New to the Finance Game?

The most popular outdoor game on the planet involves an object, in the shape of that planet, that is often spotted as if to represent seas and landmasses. Hundreds of millions play the game, while billions are football (soccer) fans. But for a person had never seen nor heard of soccer, how could the game be best explained?

Keeping score might be a place to start; the game has a time limit and the score at the end determines who wins. Next might come defense because one goal is enough to win a game. Offense is last because the exhilaration of scoring can be intoxicating and may distract from the essentials of the first two lessons.

But by participation, the most popular game is finance. Someone new to financial planning, or someone newly independent financially, might need an explanation as to how the game is played. One major difference: the finance game has no time limit, but time is an important factor. The game goes on with or without the players’ intended involvement, or how much involvement they choose.

The rules of the game remain the same, but games are played with slight differences in each league and on each field. Without a preset endpoint to determine the winner, the point of the game becomes the playing—staying in the game at a level of participation that is comfortable. Finance is more of a Saturday morning pickup game played from no definite starting or ending time and with no certain number of players.

Keeping Score

The score of the finance game is kept in dollars, raw scores data are updated daily. Banks and credit companies record and report deposits and withdrawals, payments and charges, no less than daily, online and by mobile-app. The balances on those reports are positive or negative numbers. Positive is a winning score, but the game continues.

One person with one bank account and one credit card could almost keep track of the score by memory. But often multiple financial relationships form with additional financial transactions. A mortgage often brings in another financial institution; auto financing another. Additional financial relationships may come with retirement savings accounts and business investments.

Just gathering the numbers for the calculation can seem a formidable task. But software and online applications have become more user-friendly and allow for direct transfer of data from financial institutions to the financial program. The numbers can be automatically imported and sorted. The columns and rows format of a Cash Flow Statement may seem like common sense to someone experienced with spreadsheets like Microsoft Excel or Google Sheets, but an additional player may be needed. A Certified Financial Planner (CFP®) can help make sense of it all in one Financial Statement.

Defense

From the financial history of previous months, a projection can be made for successive months, and so a simple budget can be created. A budget establishes a strategy; the game plan involves defense and offense.

Simple Budget

Source: Entrepreneur

After determining the score, the new financial player must avoid slipping into a deficit early. Expense reduction is an intimate series of choices, but it has the most immediate impact. Expenses can be sorted or categorized from unavoidable to frivolous. One low-tech method is to print the statements and go through them line-by-line with multi-colored highlighters.

Health insurance is a fixed expense; the player must be able to play. Most employers today are required to provide a health insurance option. Individuals, families and small businesses in most states may enroll at HealthCare.gov, but some states use their own websites. Loss and liability protection include home and renter’s insurance, auto insurance and business insurance. These protections have dollar limits on coverage and must be evaluated as to whether the coverage will replace the loss, cover potential liability or make the insured whole again.

Some risk cannot be limited except by controlling the amount at risk. The value of a dollar is always at risk as inflation degrades its purchasing power. An interest-bearing bank account mitigates the erosive effect of inflation, while its FDIC or NCUA insurance protects against institutional failure. Uninsured accounts pay more interest, but the higher the return the higher the risk.

In soccer, it is very difficult to come back from an early deficit. Also in the financial game is it difficult to come back from continued cash flow deficits, especially if they are financed at consumer credit rates of interest. In this case, the other team may be lending institutions. Banks are in the business of lending money at interest and charging fees for services. The trick is to not get started in the wrong direction right away; play defense first.

Offense

For most independent persons, producing more income involves a long-term strategy that must be financed by immediate short-term decisions. The game plan may call for retraining, or at least catching up, and budgeting for the cost of advancing a career or business.

Having the ball on offense also means making the most of savings and invested assets whether they are bank accounts, retirement assets or business savings and investments. Only that money that is not budgeted for current expenses should be considered for longer-term or higher-risk investment.

The big scores come late in the game. A retirement account, like an IRA or a 401k can be invested for a longer timeframe. A dollar invested in an index fund might double every seven years by the rule-of-72. But if an employer matches an employee’s retirement contribution, that same employee dollar may quadruple in that same seven years.

The game is ongoing. There is no referee’s whistle to start or end the game but there is a score. Every player can positively impact their financial score but first, they must know what the score is. The problem can be learning the game while at the same time playing and keeping score. A new financial player may be in need of assistance.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management, LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the loss of principal. Past performance may not be indicative of future results.

Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any strategy or investment product, or as investing advice of any kind.

So the question is whether 2.4% guaranteed for ten years by the United States Treasury is now the smart choice again. Outsized investments in long-term Treasuries over the last six months by global financial concerns have driven the price of U. S. Treasuries upward and their yields downward. Does the big money know something, or is it just a knee-jerk reaction by the most hyper-conservative investors? For comparison, consider that that German 10-year Government Bonds pay -0.08% and a buyer today will have received, in 2029, less than the amount invested.

Some bond investors have already profited from the drop in long-term U. S Treasury yields. On November 8th, the Ten-Year Treasury Note carried a yield of 3.24%. The coupon rate was 2.875%, so it was priced at a discount to its maturity value. That bond sold that day for $969 per $1000 bond and then closed at $1041 (2.374% YTM) on March 27, 2019. The market price of the Ten-year U. S. Treasury gained 7.46% (21.1% annualized) in that period of time while the stock market was flat.

U. S. Ten-Year Treasury Yield Chart

Source: Wall Street Journal

Market price gains for the 10-year T-note may not be over. The 10-year T-note yield reached as low as 1.37% on the Fourth of July 2016. A move this year to that previous low yield would push the price of the lucky November buyer’s bond to over $1130. Judged by recent treasury auctions, demand is still strong even though yields are already at historically low levels. Also implied by the current shape of the yield curve is an expectation that the next Fed Funds rate move may be lower, not higher.

Stock investors must also take note of this rare yield curve inversion. An economic recession is very bad for the stock market, but lower interest rates will provide support for quality companies with growing earnings and dividends. Recession, with its accompanying higher unemployment and reduced consumer demand, negatively affects cyclical stocks in industry groups like autos, retailing and services. Banks can also get stingy with their lending during a recession, avoiding the risk of default and turning up their noses at the low interest rates they can charge for customers for loans. But when presented with fixed-income investments at the lowest yields in history, investors return to the stock market as they did between 2009 and 2019.

Stock investors must always be wary of unusual events, like yield curve inversions, which affect investors’ perceptions. Mr. Market is a fickle friend that changes his mood at a whiff of an ill wind, but the average length of time between a yield curve inversion and the beginning of a recession is 18½ months, and the Standard and Poor’s 500 Index gains an average of 21% in those time periods. Vigilant holds of quality stocks are now in order.

The recent yield curve inversion may be the most important economic metric of this decade, or not. It could be different this time. Those famous last words were said before many a market drop, but consider that the recent peak yield of 3.24% for the 10-year T-bond was much lower than its average of 5.79% since 1953. An inverted yield curve seems always to predict an eventual recession, but never before has the yield curve inverted when all bond yields were this low. Investors cannot buy a 3% government guaranteed rate no matter what maturity they buy. So, does the shape of the yield curve matter when all yields on the curve are half their historic averages? Only time will tell.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management, LLC, Spire Securities LLC or its affiliates. Investing involves risk, including the loss of principal. Past performance may not be indicative of future results.

Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC