Interest Rates and Their Effect on Home Prices

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Reuters ran an article June 2018 which spelled some warning signs to the housing industry heading into a rising interest rate environment.  Since the financial crisis of 2008, Reuters reports that average home prices have increased 5% annually, far outpacing wage growth (2.8%) and inflation (2.5%).  Now the numbers can look dry and mind numbing but there is something important going on in the Real Estate market that cannot be overlooked.

Rising Interest Rates

While we are still in a historically low interest rate environment, pricing is relative.

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Since many people take on debt to purchase a home, rates can have a direct impact on the price a seller is able to sell it for.  Buyers aren’t interested in that bottom line price.  Instead they are worried on what their monthly payment is going to be and how it fits in their budget.  According to Google’s Mortgage Calculator, a monthly payment of $2,000 at 3.75 over 30 years can afford you a $431,858 dollars.  However, increasing the interest rate just a quarter of a percent that affordability goes down close to thirteen thousand dollars.  If you remember your Econ 101 class, this move of the demand curve has to be reciprocated on the supply curve or a shortage is created by unwilling sellers.

Wage Growth

Yea but Tucker the economy is going great.  Wages are up shouldn’t housing prices correspond to that?  Could be true, but remember the first paragraph.  The cost of homes has far outpaced wage growth over the last ten years.  That means wage growth has to accelerate past the cost of housing or that the velocity of the cost of housing has to be suppressed or flattened. 

Your Home is an Investment

If you are a millennial you were probably raised in an era where your parent’s home lost a ton of its value, seemingly overnight.  Your parents also probably told you that a home is the best investment you can make.  Here’s the reality though.  If you could see a daily statement on your home value like you do your 401(k) you may be surprised how much it fluctuates.  You should treat it as an investment with the assumption that it may not rise.  In fact, there is a chance that you would lose money.  Additionally, your home is considered an illiquid asset, meaning it can be more risky than investments that are readily sellable.  Stay in a level that affordability is comfortable.  Build your savings account to compensate for lean times.  And most importantly stay educated; it’s the best tool you have.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Thematic Investing: Invest in Your Interests

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I’m not going to lie.  Even though I love finance, sometimes conversations about alpha, tax-loss harvesting, forward P/E ratios, etc. can even make my eyes go cross-eyed.  So as a normal investor, I can only imagine that walking away from a portfolio review can mean walking away with a headache.  However, what if you added something that interested you to your portfolio?  We all have things that we have a passion for and thematic investing allows an individual to invest in those interests.  This article explores how you can do this at different levels of investment, while still maintaining a diversified portfolio.

Let’s Get Started

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If you have anything more than $50, you can find a ton of mutual funds out there to get started investing.  There are mutual fund companies that specialize in almost anything you can imagine.  For instance some funds investment strategies are constrained to invest in companies that reflect Catholic Beliefs.  Others have been a long proponent of Environmental, Social & Governance (ESG) investing, where they constrain their investments to companies with good sustainability scores.


Unit Investment Trusts (UIT) have increased in popularity after all but disappearing.  A UIT is unlike a mutual fund in that it is unmanaged and there is more transparency in the holdings of the portfolio.  Instead, a portfolio manager selects a pool of securities that he believes both meets the portfolios goals and have the opportunity to grow as investments.  This pool expires every 12-24 months.  This gives the investor the opportunity to decide whether to roll it over into a similar portfolio or take their cash away.  There are unit investment trusts that specialize in Large Technology Companies all the way to companies that perform better depending on what political party is in power.

Large Scale

If you have over $50,000, there are options that combine the transparency of a UIT and the active management of a mutual fund.  A Separately Managed Account can allow you to personalize your portfolio with these thematic leans, have active management from an institutional money manager, and own the cost basis to the underlying securities.  These are not only great options for individuals.  They are also a great option for non-profits with investments who are looking to mirror their mission with their portfolio.

Unit Investment Trusts (UITS) are a fixed portfolio of securities with a set term. Strategies are long term, therefore investors should consider their ability to pursue investing in successive trusts and the tax consequences.

Investment Philosophy

After working in environments ranging from an insurance agency to a discount brokerage firm I have found that every investment vehicle exists because it makes perfect sense in someone’s world.  As an advisor I feel that it is my roll to learn about my clients to properly partner them with the correct strategies.  This combined with proper asset allocation, security diversification, rebalancing and continuing conversation may help keep clients on track with their goals.

Investing vs Speculation

Speculation is purchasing an asset with the expectation of a gain over a short period.  Investing is selecting securities based off timelines, goals, risk tolerances, historical date and security fundamentals.  My goal is to help my clients invest in their future, not to try to time markets for short term gains.

Define Goals

Client investment goals are as diverse as clients themselves.  My goal as a LPL financial advisor is not to tell you what I think of your current retirement or savings plan but to find a solution that may help meet your concerns.  Typically investment portfolios work towards the following:

Capital Appreciation strategies employ securities which have the potential to grow in value.

Income Generation strategies employ securities to produce a consistent stream of income and are less concerned with them appreciating in value.

Tax Conscious strategies usually have a secondary underlying goal.  However, the main concern is mitigating the level of taxes you would pay.

Risk Aware strategies are more concerned with managing downturns rather than capitalizing on the upside of the market.

Cost Effective strategies usually have a secondary underlying goal.  However, they are less likely to employ more expensive active managers to keep the total cost of the portfolio down.

Estate Transitioning strategies are all about getting your current wealth to the next generation.  These include college planning, charitable giving, trusts, or simply making sure your loved ones have enough money.

ESG strategies allow clients to invest while avoiding companies that fall outside their moral or ethical spectrum.  These concerns can be environmental, religious or want to invest in companies with strong board governance.

Manage Risk

All money comes with attached risk.  While you may not believe it, even your checking account can be susceptible to inflation risk.  However, when it comes to portfolios, market risk is the most common one that comes to peoples mind.  My goal as a LPL financial advisor is to integrate the time horizon for the investment with a client’s loss aversion and market sentiment.  Theses break down into the following five categories:

Aggressive Growth

Select Managers

As a LPL financial advisor if I didn’t employ financial managers, I would be doing you as a client a disservice.  Institutional managers have large teams of analysts and portfolio managers who are specialized in specific asset classes.  These teams are much better at identifying opportunities and managing risk on a daily basis than I could be as a financial advisor helping clients with many unique goals.  A large part of my job is finding portfolio managers that meet a client’s goals and risk sensitivity.

Due Diligence

There are literally several 1000 mutual funds, etfs, stocks, bonds and other securities in the world.  While I may not personally trade many accounts or decide on allocation weights, I do spend much of my time in webinars, going to educational events and reading investment philosophies of individual managers.  All of this goes into deciding the original investment options as well as looking for idea to improve your current holdings.

Annual Review

Financial health is a real thing.  If you go to your dentist twice a year for a teeth cleaning and checkup, why wouldn’t you meet with your financial advisor to keep me updated on what’s going on in your life!  This input helps me make better recommendations for your portfolio going forward as well as introducing you to additional strategies that may benefit a change in your life!

Additional Services

Portfolio management is just a part of what I do.  There are many other questions that will arise during your life that have financial implications.  Whether this is saving for college, securing income, collaborating with your employer retirement plan, evaluating your life insurance or anything to do with building your financial health, that’s what I am here for.  Remember my goal is your piece of mind.

There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes.  The purchase of certain securities may be required to effect some of the strategies.  Investing involves risks including possible loss of principal.

Improvise, Adapt, Overcome: Fighting Rising Interest Rates

Bond Basics 101 here in a rising interest rate environment.  As the Fed raises interest rates, through a complicated series of events, borrowing becomes more expensive.  That means when a company looks to borrow money through bond financing they have to offer a higher coupon to be attractive to investors.  However, because I can get a new bond with a higher interest rate, the old bond I bought is worth less.  While we are conditioned to look at coupon.  What bond traders are going to look at is yield.  That is the coupon/market price of the bond.

TO SUMMARIZE: If you have a coupon that is less than another bond you have to lower the market price to get a competitive yield.  So what does all this financial jargon mean?

If you own a traditional bond mutual fund, the fund is priced to the day to day market changes of the underlying security.  That means that when interest rates go up, the value of the underlying bonds drops and the total value of your holdings goes down.

Improvise: Diversification and Laddering

If you are chasing higher returns from your bond funds you can basically do two things.  Go longer term or go riskier.  Going riskier means the conservative side of your portfolio is no longer conservative; as discussed going longer term leaves you exposed to interest rates rising.

Diversifying your bond classes can help you add risk without throwing out the baby with the bathwater.  By adding sub-asset classes like high yield, bank loan, long duration, short duration, you can potentially mitigate some of your risks while adding some return that comes from riskier asset classes.

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Laddering is a process of buying fixed income with progressively longer duration.  When your asset at the shortest matures, you buy an instrument that fills in the longer side.  As an investor this enables you to do two things.  Firstly, you mitigate the interest rate risk by allocating some of your funds to short term investments.  Secondly, you can increase your effective yield by taking advantage of longer term bonds.


Adapt: Annuities

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The industry has noticed the need for investors looking for higher returns with a need for protecting its capital.  The industry has responded with a different method to meet this void.

Annuities in the past have been criticized as illiquid, complicated and costly asset classes.  While they provided income benefits, many professionals and commentators warned the costs outweighed the benefits.  However, with the rise of Index-Linked Annuities, an investor can achieve principal protection and market performance with relatively lower costs than variable annuities.

These products don’t give you this upside without some consequences.  These products have their own tax issues that should be investigated before investing.  Additionally, because the issuer is taking on some risk for the downside in the market, they’re going to ask something in return.  These requirements come in the form of caps, participation rates and duration.

Overcome: The Power of Education

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Let me tell you right now.  Low interest rates, combined with rising rates are a real pain point for investors and advisors alike.  There are dozens if not hundreds of strategies that have been developed to increase yield while mitigating risk.  The most important component to this process is to stay educated.  All products have their positives and negatives.  However, working towards what makes best since to your personal financial plan is important.  If you struggle with these questions please contact a financial advisor.  I am more than happy to schedule a call with you to see if this is something I can help you with.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing in mutual funds involves risk, including possible loss of principal. 

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value.

Is it Time to Consider a Separately Managed Account?

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Have you been sticking aside $100 a month into an IRA?  Do you have a bunch of random stocks in a brokerage account?   Chances are that your advisor paired you with a mutual fund or several funds that matched your investment goals.  Or maybe you picked a target date fund because it was easy.  Here are a few reasons to consider a Separately Managed Account (SMA).


Mutual Funds have individual investment goals that portfolio managers are required to abide by.  Launching into an SMA you have the ability to customize the investment parameters of those goals.  As an investor you can choose to exclude certain types of securities or impose an investment quality on the underlying security.  For example, if you do not want to own oil stocks for environmental concerns, you can ask the portfolio managers to avoid them.


Some mutual funds generate dividends and capital gains which are distributed to their investors.  That means if you hold those mutual funds in a taxable brokerage account, you could pay taxes even in a year when your fund loses money.  Because an investor owns the individual securities in the SMA, they can potentially limit this sort of impact as the cost basis would be their own.

If mutual funds are not specifically designated as a tax-efficient fund, their focus may be

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on striving to maximize their potential returns rather than considering tax obligations. SMA’s often utilize tax harvesting methods in their trading to limit the taxable gains to their clients.  So if your money is held in a taxable account, this may be worth exploring.

In today’s day and age it is not uncommon for a company to distribute their own stock as a benefit to their employees.  It is a great way for employees to participate in the growth and earnings of the company they work for.  However, letting this build up over time can lead to a concentrated stock position that leads to single stock risk.  Moving out of this position to diversify can lead to heavy tax obligations if not properly managed.  Some SMA’s will take stocks instead of cash for an initial investment and will work to diversify the holdings while employing a tax-loss harvest strategy.

Fee Structures

Mutual funds and SMAs often have a few layers of fees.  Some mutual funds have upfront sales charges that lower your initial investment.  It is difficult to compare the internal costs that SMA’s and Mutual Funds have because they range so much.  However, funds or SMAs that do not have an upfront sales charge can put the entire weight of your money to work at the front end.


Separately Managed Accounts aren’t for everyone but they serve a purpose.  If you are an investor with over $50,000 in investable assets they may be worth looking into.  If there is any further education I can provide to this end please feel free to contact me on the schedule a consultation tab.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Stock and mutual fund investing involve risk, including possible loss of principal.  No strategy assures success or protects against loss.

The target date is the approximate date when investors plan to start withdrawing their money.  The principal value of a target date fund is not guaranteed at any time, including at the target date.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.