The Arbor Outlook: Bannister, Disney and Economic Visions

"If you can dream it, you can do it."
— from Walt Disney

May 6, 1954, dawned cool and breezy at Oxford's Iffley Road Sports Ground, less than ideal conditions for a runner to attempt a world record. But a local medical student knew that two other international athletes were capable of covering a mile in less than four minutes, and soon might, and he wanted the record held by his native England.

His accomplishment was stunning, almost like Chuck Yeager shattering the sound barrier, or Neal Armstrong's moon walk. Many experts thought, that like the sound barrier, the four-minute mile was a mark that couldn't be broken by a human being. But the barrier was simply psychological.

In the 64 years since young Roger Bannister ran the first sub-four-minute mile, his record has been bettered thousands of times. The current mark is 17 seconds faster than Bannister’s. My husband loves track and field, and I will occasionally watch a televised event with him and marvel at the power and grace of my fellow humans. The son of a college friend competed in the Olympic trials in the 400 meter run a while back, and watching him compete was especially exciting. That Bannister, who died recently of Parkinson's disease at 88, became a respected neurological consultant and admired and eventually knighted citizen of Great Britain, adds luster to his accomplishment.

Finance imposes psychological barriers as well. The Dow Jones Industrial Average hit 1,000 in 1972. The average investor could not have predicted a DJIA ticking along at 25,000. I stumbled across an article recently about the important psychological barrier that existed when the DJIA was at 10,000. This occurred in March of 1999, 19 years ago.

The advent of the IRA in 1974, which allowed Americans to shelter income annually in a tax-deferred investment account, was a Roger Bannister moment. Who could have envisioned that our investments could grow untaxed for decades? Another barrier was broken when 401(k) plans were introduced four years later, permitting employees to avoid immediate taxation on a portion of their income. Roth IRA's, profit sharing plans, defined benefit plans and other individual and corporate investment vehicles all represent watershed thinking on the part of economists.

Business innovation is also commensurate with benchmark achievements. If you're reading this on a personal computer or iPhone, you are utilizing technology that was once considered impossible and impractical, like the four-minute mile. Who could have conceived 30 years ago that a small Seattle coffee company would eventually own 27,000 stores worldwide? Investors, entrepreneurs and start-up founders in our ever-evolving economy are dreaming, like Roger Bannister, of breaking barriers that the current business climate assures them cannot be bettered.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Bond Hedges, Correlations and Ray Charles

"I sat there with two tens ... I thought I'd have some fun; The dealer hit 16 with a five... Just enough to make 21."
— from "Blackjack" as performed by Ray Charles

Astute retiree investors may want to reconsider the time-honored, classic 60/40 portfolio investment strategy. Since 2000, bonds have been anti-correlated with stocks, meaning that bonds went up when stocks went down. Investors owned bonds for income and also because they hedged a stock-laden portfolio.

But now, bond yields appear to be moving higher and the anti-correlation relationship has been skewed. In fact, bonds may be becoming non-correlated (meaning they’ve lost any relationship with stock movements) and in many cases have become positively correlated with stocks. This means that stocks and bonds can go up and down together. That’s not a problem when stock prices are rising, but should markets take a downturn, stocks and bonds that are positively correlated can fall simultaneously. In this environment, bonds may no longer serve as a hedge against portfolio loss.

If you were completely invested in stocks from late 2007 to early 2009, you lost more than half your money (the S&P 500 lost over 56 percent peak-to-trough), so holding bonds (which gained value over that time frame) would have mitigated losses. In a 60 percent S&P 500 index/40 percent aggregate bond index portfolio, an investor would have lost one-third instead of over one-half of his assets from October 2007 until the end of the downturn in March 2009. However painful, losing a third beats losing over half, so bonds served as an effective portfolio hedge at the height of the Great Recession.

Bonds can still be a serviceable portfolio component, especially if investors own individual bonds and keep the duration on them extremely short. Buying the best quality, high yield corporate bonds available, ones that mature within two to three years, allows you to enjoy some yield while maintaining maximum portfolio flexibility.

Investors may consider buying the short term bonds of companies whose stocks they might own in a risk-on environment and where the investor is first in line to get paid on the maturity ladder. It’s unlikely there will be major credit losses with a diversified basket of highly rated high yield bonds in the next two to 24 months. If an investor is getting over 4 percent on average on these bonds, he's probably doing well. If he steps up the yield to the 5-6 percent range for that under-24 month maturity range, he's likely taking a large degree of credit risk and the risk-adjusted marginal return may be unwise.

Preferred stocks are also one of the few places to get significant, predictable yield in today's market. Some can generate enough meaningful income to balance the interest rate risk that an investor may be assuming.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Spending Some, Saving and Nick Drake

“When the party’s through ... seems very sad for you; Didn’t do the things you meant to do.”
— from “Day is Done” as performed by Nick Drake

Consumer debt is approaching levels not seen since before the Great Recession. And on the flip side, personal savings as a portion of disposable income is now at its lowest level in 12 years.

Some of this is certainly understandable. People feel they “can breathe” again in terms of personal spending and borrowing. The economy is improving, unemployment is down, and folks feel comfortable with their financial circumstances.

Traditionally, Americans also feel more inclined to borrow when markets are on an uptick, as they were in 2017. People look at their balance sheet and see their assets climbing in value and say, “Hey, I’m worth more now. I can afford to borrow more, spend more and save less.” The net worth of American households rose by $41 trillion in the third quarter of 2017 alone. This “wealth effect” impacts consumer behavior.

In late 2017, repayment schedules on new car loans reveal a fascinating story. Americans purchasing new autos signed on for an average repayment period of 69 months, or just under six years. The Wall Street Journal noted that “in the fourth quarter (of 2017), consumer debt, excluding mortgages and other home loans, rose 5.5 percent from a year earlier to $3.82 trillion.” That’s the largest increase since 1999, the first year that statistic was recorded.

Meanwhile, Americans are saving less money than at any time since the end of 2007. Savings rates also remained low during the housing boom in the two previous years, 2005 and 2006.

Many Americans borrowed heavily as interest rates remained relatively low these last few years. We purchased homes, plowed money into business opportunities, and increased our discretionary spending. But volatility in markets, dormant for almost 18 months, reared its head again in February. In addition, the Federal Reserve seems committed to raising interest rates. This combination, intertwined with other global forces, could portend an economic slowdown.

When a downturn occurs, and everyone retrenches simultaneously, that six-year car loan may not feel so comfortable. It’s certainly advisable to invest in valuable opportunities and fun to spend freely during healthy economic years, but it’s equally important to save money to see us through periods of economic slowdowns. Consuming and saving simultaneously may seem like an oxymoron, but truthfully, the two activities are not mutually exclusive. Spending and borrowing is fine, but it’s equally important to prepare for periods when economic expansion is not occurring.

Folks eschewed personal savings while enjoying rising asset values twice in the last 20 years: just before the bubble in the late 90s and again before the Great Recession nine years ago.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Market History, Time Horizons and Paul Simon

“I don’t know a soul who’s not been battered … I don’t have a friend who feels at ease; I don’t know a dream that’s not been shattered … Or driven to its knees. But it’s all right, it’s all right, for we’ve lived so well so long.”
“American Tune,” as performed by Paul Simon

That markets are complicated is, admittedly, a cliché. Thing is, it doesn’t mean it isn’t true.

Volatility returned with a vengeance on Feb. 5 when the Dow Jones Industrial Average tumbled almost 1,200 points in one day, falling from 25,520 to 24,345. The drop was especially jarring, coming on the heels of 2017’s record low volatility. It was also a not-so-subtle reminder that stock prices do not ascend relentlessly.

Historically, stock prices have indeed moved inexorably higher over time. On Dec. 31, 1990, the Dow closed at 2,633. So from the last day of 1990 to Feb. 5 of this year, the Dow gained 21,712 points, meaning that the Dow Jones is more than eight times higher now than it was 28 years ago. And that growth occurred in spite of the bubble and the Great Recession. These numbers would certainly suggest that not being invested in markets can cost you a lot of money.

That said, the climb in prices from 2,633 to 24,345 over this 28-year period was anything but steady and smooth. On Dec. 31, 2007, the Dow closed at 13,264. But on March 9 of 2009, it closed at 6,547, meaning that in about 15 months, the Dow declined by more than 50 percent. So if you had $1 million invested solely in the 30 companies of the Dow Jones (and few people do, of course) at the end of 2007, 15 months later your investment account would have been worth less than half a million.

March of 2009 was the trough of the Great Recession. Not only were markets tanking, but the economy was teetering on the brink of collapse. Stocks began rebounding later in 2009; it took much longer, though, for the economy to right itself. Nine years later, our concerns have turned to inflation and interest rate hikes, driven by higher wages.

Long term, stocks are likely to outperform most other investment instruments. But if we want to make money in the market, we’ve got to consider our time horizon (how long we want to or will likely remain invested), and we’ve also got to endure some occasional downturns and volatility. When we are surrounded by steady growth and low volatility, as we were last year, it’s easy to forget that markets do indeed fluctuate, and corrections occur occasionally. That we haven’t seen either in a while sometimes makes it painful to remember that both are part of the deal.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.

The Arbor Outlook: Super Cattle, Outsourcing and Guy Clark

“One man’s reason is another man’s rhyme … One man’s dollar is another man’s dime.”
“Hank Williams Said it Best,” as performed by Guy Clark

A Texas wildcatter drills in a fertile field, oil gushes forth and overnight he becomes a multi-millionaire. Convinced that his business acumen is generic, he invests in a scheme for developing a brand of super cattle. His true expertise is geology, not animal husbandry. But he pours millions into research and even more into livestock, chemicals, and land. The experts convince him that if he will just front a little more money, a huge payday is imminent. But the payday never arrives.

Or consider the professional athlete who becomes a real estate mogul in the offseason, even though he has no experience in commercial or residential development. He throws hard-earned millions into acreage, pays for studies and permits, hires a builder and sales staff. Real estate takes a downturn and the home sites cannot be sold, even at a discounted price. And the athlete returns to practice wiser and poorer.

Sticking to one's core competency may be boring, but it usually works. We are most often successful at what we know best. Enterprises in which we have little experience that require lots of up-front cash should probably be avoided, even if the potential payday sounds incredible.

Have you ever heard anyone brag that everything he touches turns to gold? You may want to steer a wide berth around such a gentleman when it comes to money. Because while it's true that some people are so intelligent and skilled that they are more successful than others in almost all their endeavors, it remains relatively difficult to transfer success from one business arena to another. Remember Dionysus, who granted the wish of King Midas that everything he touched would turn to gold? Midas soon begged out of the deal when his food, drink, and even his daughter were transformed into metal.

It follows, then, that making and managing money are two very different skills. A wealthy retired business owner is not likely to drill his own teeth or climb under his car to perform repairs. He outsources.

I’m confident in my abilities as an investment advisor, but I currently work with a talented CPA, one who provides tax planning and preparation to our business and family. I also contract with an actuary to consult on our business retirement plan. It is easier and more cost effective to work with such competent individuals, even though we could theoretically tackle these tasks ourselves. These professionals also offer the perspective of objectivity. Our decisions about money can sometimes be influenced by emotion, and a third party professional can often see our financial situation in a way that we ourselves cannot.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 –, a “fee-only” registered investment advisory firm located near Sandestin.