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5 Mistakes People Make When Looking At Colleges
The school year has started and with it many families with high schoolers will either begin looking at schools or try to narrow down their final selection. One of the services I offer as a financial planner specific to college planning is helping families understand what they can expect to pay at a given school factoring in their financial situation and the student’s academics and how that will result in financial and merit aid to get to their net cost. The goal of this service is to help families identify schools that won’t result in a mountain of student loan debt. As a rule of thumb, when it comes to taking on student loan debt, if families can limit student loan debt to the amount of direct loans they can receive through the federal government that is considered a success. There is a limit though of $31,000 on the total amount of these loans you can get as an undergrad. This amount may not be enough to meet the total cost of college for some families. If this is the case, then shoot for no more student loan debt than what the student can expect to make as a first year salary. This allows those in higher paying professions to take on a bit more debt and still be able to afford the payments upon graduation. If you find yourself going beyond these debt totals, then you may be in for a rude awakening when you start paying back the loans. The now graduated student might find loans taking up too much of their paycheck to start making progress on building their own future financial stability by being able to establish emergency savings or investing in a 401k. If the parents are paying back the loans, they may find themselves now facing a new debt payment at the same time as the thought of retiring is becoming attractive. For parents going through this now or will be soon in the coming years this can be a daunting process. Let’s face it, this space has changed so much from when I, or many of you, went to school. In the early 90’s, I went to an in state school where tuition was $1000 per semester. All-in the cost for an entire year of school was in the area of maybe $6000. This was still in the age where you could work, save a couple of thousand dollars, and go to school with a reasonable amount of student loans. If you want to look at a public four year institution those days are long gone. School is just too expensive now to be able to take that same approach the previous generation did. With many state schools costing at least $30,000 per year, there is no way a student can earn enough to pay their way. There are still circumstances where a gifted student might get a full ride or a family of lesser economic means gets the vast majority of school covered with grants but that applies to a very, very small group of people. Most people now have to cover the cost with a combination of savings, scholarships/grants, and loans. Each year I work with families looking for assistance in this area and I see the same issues over and over. In this article, I will cover some of these common items I see and what you can do instead to be in a better position. 1. Not knowing your EFC/SAI The first step in knowing if you are going to receive any financial aid is knowing how much the government thinks you can contribute to your child’s education. This is done by filling out the FAFSA form. This is a form that is available each year in the fall, although a new form will be unveiled this year and won’t be available until December 1. This form can be accessed here and is used to gather financial information about your family. Using this information, the government comes up with what used to be called your EFC (Expected Family Contribution) and now will be called the SAI (Student Aid Index). This is essentially the amount the government thinks you can put towards college. Now let’s be very clear about this number. Just because the government thinks you have the resources to pay that much, it may not line up at all with what you can actually put towards the cost of college. It is just a formula. But, like it or not, this number is used to determine if you will receive any need based financial aid. In the most simplistic explanation, if your EFC/SAI is more than the stated cost of attendance you will likely not be receiving financial aid at that school. If it is less, then you might, but no guarantees. It will depend on the school and the amount of demonstrated need. It is important to note that a given EFC/SAI number does not guarantee you will receive need based aid at every school you apply to. Say your EFC/SAI number is $15,000 and you apply to a smaller public in-state school with a cost of attendance of $18,000. In this case, there is only a demonstrated need of $3000 and you may not get offered any aid. On the other hand, if you apply to an Ivy League school with an $80,000 cost of attendance you are likely a very strong candidate for need based aid. The key is to compare your EFC/SAI to each school’s stated cost of attendance to get a feel if need based aid is a realistic expectation. If need based aid looks like a possibility, then you need to understand how the school addresses that need. Each school will have different numbers on what percentage of need they meet and if that need is met through grants, scholarships, work study or loans. There are databases like collgeboard.org and collegedata.com that have information for each school but those numbers are averages so be careful about relying on them too much for your situation. 2. Not establishing a budget before looking at schools. Think about all the major purchases you make in your life. You establish a budget or know how much you can spend before you go shopping for things like a new car or house. If you are comfortable with the monthly payment on a car costing $40,000 you don’t even bother looking at a Tesla Model S with a base price of $75,000, right? If you can afford a $2500 monthly mortgage, you likely aren’t going to the new housing development with million dollar plus homes and thinking they are a legitimate option. Of course you don’t, because you know you can’t afford options that don’t fit within your budget. A four year college education will likely cost anywhere from 80k up to over 300k making it one of the largest expenditures you will make in your life. And yet, I see many families come to me with a list of schools that do not factor in their financial situation at all. The budget you set should be based on the combination of dedicated college savings plus any other resources to be used for college plus reasonable student loans. For example, let’s say you were able to save $50,000 for college in a 529 plan, can contribute an additional $5000 per year and feel okay with up to $30,000 in student loans. That leaves you with $12,500 per year from your 529 plan, $5000 in additional resources and $7500 per year in loans for a total of $25,000 per year. This doesn’t mean the stated cost of attendance at the school needs to be $25,000 or less but that your projected cost should be no more than $25,000. This means you can target schools with a net cost of $25,000 or less after any financial and/or merit aid are applied. 3. Touring schools without knowing your cost ahead of time. This is a very common mistake I see from families. It tends to play out like this. Usually in the student’s junior year, the list of schools gets compiled, and families find time over long weekends or longer breaks to go visit some of these schools. The student will decide they don’t like a couple of the schools while others rise to the top of the list. It is at this time parents will check in and say here are the schools we have a high interest in. Now, what will they cost? And, usually, it somehow works out that their child has a knack for choosing the ones that will have the highest net cost. I get to deliver the news to parents that the school is $20,000 per year above their budget and ask if they want a list of other schools that might be a better financial fit. The problem is the student is set on the expensive school and there is only so much time and money left to go do more tours. The parents feel stuck. But this is easily avoided. Every school has a listed Cost of Attendance (COA) that you can find on their website. This is intended to be the all-in cost for the school including tuition, room & board, books, fees and some even include transportation and personal expenses in the COA. This establishes the starting point to determine if a school fits within your budget or not. It is important to note that just because the COA is higher than your budget does not mean the school should automatically be removed from consideration. These numbers are before any merit or need based aid is applied. Each school will also have a net price calculator feature which is intended to give you your estimated net cost at that school, including any expected merit and/or need based aid. These calculators vary in accuracy from school to school, but they should at least give you a ballpark idea of what you can expect a given school to cost. Going through this exercise before making your travel plans will let you know which schools should fall within your budget and are worth taking time to visit. Let’s run through a few scenarios for a family with a budget of $30,000 per year and an EFC/SAI of $50,000. School A is a state public school with a COA of $45,000 and $17,000 in projected merit aid bringing the net cost to $28,000. This school should be a safe financial choice. School B is a small private school with a COA of $60,000 but has $28,000 of projected merit aid resulting in a net cost of $32,000. While not within the $30,000 budget, it is very close and if it is high on the list can still be worth checking out. School C is a state public school with a COA of $48,000 with no projected merit and/or needs based aid leaving the projected net cost at $48,000. In this scenario, schools A and B are worth keeping on the list while school C has a net cost well above the family budget and can likely be removed. This allows the family to focus their time on schools they can afford and just worry about the fit of the school for the student since the financial piece will likely be okay. 4. Not understanding how different schools handle aid Just because your student has good grades and test scores does not mean they will get big scholarship dollars at every school. The same student can apply to 10 different schools and receive 10 different offers. There are a couple of things to understand related to this; what are the different types of aid and what type of aid a given school tends to give out. Schools that have very rigorous admission standards may not offer much in the way of merit aid. This does not just apply to Ivy League schools either. Many public state schools fall into this camp as well as a large number of smaller private schools. Since the admissions standards are tough, by default every student there has a very strong academic track record so very few get awarded with a scholarship. On the flip side, these schools tend to be very generous with need based aid if you can get in. Other schools offer very nice merit aid packages. Some public state schools will have thresholds that if the student meets, they will automatically receive the scholarship. These are usually based on GPA and/or ACT/SAT test scores and can be found on the school’s website. There may be multiple tiers of the scholarship offered by the school as well with larger awards for higher grades/test scores. This can bring an out of state school in line or even below in state costs. Many private colleges also offer generous merit aid packages. While these numbers aren’t usually published like the public schools are, they can typically be worth in the range of $20,000 - $30,000 which is a big help as many of these types of schools have a much higher starting COA and can bring the net cost in line with public schools. Other schools may not offer up much in the way of either merit or needs based aid but might have a lower starting COA instead. Many smaller in-state public schools may only offer a few thousand dollars of merit aid but might have a COA of just $20,000. This is not to say a very strong student won’t get more merit aid from any of these types of schools. What I am trying to point out is what you can plan on receiving. If you apply to one of the elite schools you won’t be in line for an automatic university scholarship, but you may end up receiving a departmental, leadership, or some other type of scholarship. These awards could be significant in terms of dollars and maybe even a full ride. All schools will have a scholarship section on their website. You can see there if they offer automatic scholarships or if scholarships are limited in number or have to be applied for separately from admission. When forecasting the cost of college though it is difficult to assume a student will receive one of these scholarships that are handed out on a very limited basis. These types of scholarships can be trickier to navigate as a university may offer hundreds of these types of scholarships and it can take a lot of effort to sort through them to see which ones the student may qualify for. 5. Assuming your cost will be the same as someone else’s at the same school. If you know others who have gone through the college selection process before, you likely have heard stories about what other people have received in terms of scholarships, grants, or maybe even full rides. One mistake I have seen is people taking this information and assuming it will apply to them. Just because your neighbor’s kid received a $30,000 scholarship at a given school doesn’t mean your student will, even if they have similar academic records. The reality is that every family has their own unique combination of factors, be it academic, financial, family size, types of assets, heritage, you name it. Schools can use all these factors to determine who they give money to and how much. You don’t know every detail about another family whose story you’ve heard or how the school uses that information, so it is almost impossible to compare apples to apples. And, the criteria can change from year to year. My daughter graduated high school in 2021 and schools treated aid very differently during those peak covid times than they did previously or will moving forward. Kids didn’t have to report test scores and schools were worried about declining numbers so may have been more willing to go higher with aid to keep their attendance numbers in place. With the new FAFSA process starting this year and student loan overhaul with the SAVE program, I would expect more changes in the handling of aid in the future. Even the websites I mentioned earlier with the numbers for how aid is handled at a school need to be taken with a grain of salt. These published numbers are averages so you can’t assume that you will receive the published amount of grants or scholarships. Your situation is unique, and your numbers and financial award will be unique to you. If the average need based aid award is $15,000 but your EFC/SAI is within $5,000 of the COA, you will get less than the average, if anything, and not the average. In summary, the process of shopping for college can be overwhelming. We all want to do the best for our kids and we want them to have a great college experience. It can be difficult to have a conversation with them where finances might eliminate an option they are interested in. But there are so many great schools out there and at the end of the day, I am a big believer that it is up to the students to make the most of their time at the school. Like most things in life, they will get out of it what they put in. Going to a very expensive school doesn’t guarantee a great experience. Heck, I wouldn’t trade my $6,000 per year University of North Dakota experience for anything. I got involved in campus activities, had a great time, and have many lifelong friends and terrific memories from there. As a financial planner, I don’t have a dog in the fight as to where your kid goes to school. I truly want every child to go have a great experience and come out ready to take on the world. I just don’t want the student or the parents to have the downside of taking on an amount of student loan debt that can have a negative impact on your life. This can be avoided by taking some time upfront and doing some homework so you don’t make some the mistakes we just discussed here. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
It's Been A Good Year For The Stock Market, Or Has It?
Many of us were glad to move on from the dismal market performance of 2022. There was almost no place to hide as even the supposed safe investments in portfolios took a big hit. 2023 has brought welcome relief as the markets have come roaring back and your 401k balances have recovered. At least it feels that way, but has that actually happened? I was already thinking of this question and then last week a client rightfully was curious about how his portfolio has performed this year. When I gave the number, he wanted to know how this compared to market performance as the number felt low compared to how it seems the market has done this year. It is worth explaining what has been driving your portfolio returns. There is no debate whether there has been a bounce back in market performance so far in 2023. While 2022 saw higher interest rates being the catalyst for driving down not just stock prices but bond prices as well, 2023 has seen a boost from the AI revolution. The difference is those higher interest rates brought down almost everything in 2022, but AI has not had the same broad based boost in 2023. In fact, only a certain segment of the market has really benefited. Let’s take a step back and take another look at how bad 2022 really was. Here are some of the major indices and their performance for the year. Dow Jones: down 8.8% S&P 500: down 18.1% NASDAQ: down 33% S&P midcap 400: down 13.1% S&P small cap 600: down 16.1% MSCI EAFE index: down 14.5% MSCI emerging market: down 20.1% Barclays US aggregate bond: down 13% That’s pretty ugly, right? This is your classic diversified portfolio formula: large cap, mid-cap, small cap, international, emerging markets, a mix of growth and value and fixed income. It all had losses on the year. Cash, Commodities, and Energy were probably the best performers last year, and generally, these items don’t make up a very big portion of a typical investment mix, likely not much more than 5%. And 2023 has been better for sure. If you have been following market activity you are aware that big companies such as Apple, Microsoft, Tesla, Amazon, Google, and Meta have all had great years. So things are great, right? Let’s look at the performance of these stocks. Those are some pretty amazing results. All are up at least 35% on the year, Tesla has almost doubled, META has and Nvidia, the current king of the AI space, is up over 200% so far. That is why this group has been dubbed ‘The Magnificent Seven’ in 2023. But a closer look at these companies shows that they all occupy a common space in the market; large cap, growth, and say what you will about Tesla, tech companies. How has this big run impacted the market? When we take a look at the same indices for 2023 year to date performance we get the following: Dow Jones: up 3.4% S&P 500: up 15.5% NASDAQ: up 29% S&P midcap 400: up 6.8% S&P small cap 600: up 4.3% MSCI EAFE international index: up 8.58% MSCI emerging market index: up 3.1% Barclays US aggregate bond: down .25% So the S&P 500 and NASDAQ look good, but the rest? While certainly better than 2022, they are just in line or even slightly below an expected 8-10% return for equities. So what happened to all of the 35% plus returns? As I mentioned earlier, these stocks all kind of fit in the same bucket, large cap growth tech. The issue is that “The Magnificent Seven” only appear in two of these indices and those are, not surprisingly based on performance, the S&P 500 and NASDAQ. Apple and Microsoft are components of the Dow Jones as well but the others are not. According to the Motley Fool as of July 23, these seven stocks accounted for 73% of the gains in the S&P 500. That’s right, 73% from just seven stocks! According to this data as of August 23rd, only 272 of the 504 (yes, there are currently 504 individual stocks in the S&P 500) are even positive for the year. But the S&P is a market weighted index meaning the bigger the stock valuation of the company, the bigger impact it has on the index performance. And guess which stocks happen to be the top seven market cap stocks in the S&P 500? That’s right, our Magnificent Seven. In fact, those seven stocks make up just over 27% of the entire S&P 500 on their own. As a result, as goes these companies, so goes the S&P 500. As mentioned earlier, AI has been a boon for this small group of companies and they have continued to record huge profits with positive outlooks for the future. This is a great combination for stock prices. However, many companies continue to struggle with various macroeconomic conditions. High interest rates have brought the housing market to a grinding halt, the rate of inflation has slowed but prices remain high and consumers are having to be more choosy about what to spend money on. And, there is still a lingering cloud of a potential recession in the not to distant future so many companies are hesitant to be too bullish about the coming year. As you might guess, this is not a good combination of things for stock prices. So, what does this mean for a typical investor? Prudent portfolio management calls for having a diversified portfolio with holdings of various weights likely across all of the indices mentioned above. Holding all of these different investments in 2022 would have helped prevent you from being down 30% last year when a large part of the tech sector fell sharply due to rising interest rates and a correction from the sky high valuations reached at the end of 2021. Depending upon your equity exposure, hopefully, you were down closer to 15%. But this year, that diversification is holding you back. When looking at a typical 60/40 mix for this year you might be in line for an actual overall blended return of roughly 9%. That’s not bad at all but it is a far cry from the monster returns of the Magnificent Seven and the ETF QQQ which is a decent proxy for the NASDAQ index. If you were expecting those returns across all of your holdings, you are likely wondering why your 401k balance has seemingly lagged. The answer, your diversified portfolio is likely holding a collection of funds, many of which may not have any exposure to the Magnificent Seven and these are watering down your overall returns. I am not meaning to imply this is a bad thing. Again, this approach helped avoid much bigger potential losses in 2022. If you are young and have the risk appetite then maybe allocating a larger portion of your portfolio to this group makes sense, But, for many investors, risk appetite and where they are on their financial roadmap dictate a more balanced approach. So going back to the original question. Has 2023 been a good year for the stock market? The reality is it has been a tale of two markets. Large cap tech is enjoying a great year while everything else has honestly just been ok. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
The End of Crypto?
For those of you paying attention, there was a major event in the world of crypto over the past several weeks. FTX, one of the leading crypto exchanges filed for bankruptcy and caused waves throughout the entire space. You may remember FTX as one of the several crypto related companies that overtook ads during last year’s Super Bowl. FTX featured ads with celebrities including Tom Brady recruiting people to the platform, Stephen Curry promoting how easy it was, and, in a now extremely ironic campaign, Larry David as the naysayer saying this won’t work and he’s never wrong about this stuff. FTX even got naming rights for the Miami Heat basketball arena. They made a big public splash and less than a year later are bankrupt and facing numerous lawsuits. What happened? What does this mean for the future of crypto? Can we trust crypto? *** This story is still evolving with new facts coming out daily. This is not intended to be a journalistic piece about the downfall of FTX with precise fact checking so I apologize if some of what I state here ends up being proven to be something else. Instead, this is intended to be a general commentary about the overall crypto environment and how it may impact investors using FTX as an example of the risks involved. Background First, let’s examine what happened. FTX was a major cryptocurrency exchange meaning it provided a marketplace for others to buy and sell crypto. This is like stock exchanges such as the New York Stock Exchange and NASDAQ. These exchanges are where all of the stock trades actually occur. One significant difference between stock and crypto exchanges is that in many cases crypto exchanges also can act as custodians of investor funds. Custodians are the ones who actually hold the investor’s funds. A custodian has to keep records of each client’s account and has to be funded so that when clients go to withdraw funds the custodian can meet the customer’s needs. When it comes to our stock market, we use companies like Vanguard, Fidelity, Charles Schwab, banks, and many others to serve in this role as custodians. Crypto though relies on the exchanges themselves or individuals to store the coins in cold storage or a personal wallet of sorts. When it comes to crypto, the largest exchanges such as Binance, Coinbase, and FTX may play the role of custodian as well. This means the investor opens an account, deposits funds, and then uses those funds to buy and sell crypto. The customer then uses the same companies to buy and sell crypto using their exchanges. What went wrong? In short, FTX hit a major liquidity crisis meaning they were short of cash. As I described above, this should not be an issue for a custodian as they need to keep the client’s funds separate so they can accommodate withdrawals. So why did FTX run into this issue? They took customers’ deposits and used them for other purposes, propping up other parts of their business. FTX had a sister company, Alameda Research, that was involved in riskier trades and needed support. FTX also created its very own cryptocurrency, FTT. FTX lent the cash they had on hand from customer deposits to Alameda. Alameda in turn lent that money with some of these loans secured by the FTT coin. With the cash not being on hand, the balance sheet of each business was largely propped up by the value of the FTT coin. As with other cryptocurrencies, there can tend to be a large amount of volatility with the values of these coins and they are not the equivalent of cash. Instead, they fluctuate with the market. FTX was in a position where if they needed cash they were largely dependent upon selling FTT to raise the cash. According to Marketwatch, FTX held about $16 billion in customer assets. The value of FTT dropped as FTX was faced with $5 billion in withdrawals. As a result, FTX was faced with an $8 billion shortfall and FTT had lost too much of its value to make up the difference. And just like that, you have a company that is bankrupt. FTX went looking for help to stabilize the business. Binance, the largest crypto exchange, said they would step in but after due diligence in looking at the financials, they decided to back out. FTX was left with no choice but to file for bankruptcy. There are approximately one million creditors of FTX waiting to see if they will get any of their money back. What does this mean for Crypto? Crypto has always been a volatile space and, as a whole, the value of the crypto space has taken a big hit this year. A year ago, the market value of all cryptocurrencies hit $2.9 trillion, and as of this writing that was down to less than $900 billion. The explosion of the crypto market began during Covid and continued growing through 2021 and has contracted this year even more than the stock market. One of the big issues facing the crypto space has been a lack of regulation. The SEC oversees the traditional investments and our stock markets and has made noise that they want oversight over crypto investments and markets but that hasn’t happened yet. The failure of FTX will most likely increase the urgency of regulation as the government will want to try and protect customers from another similar event. This is a big blow to the reputation of crypto. It raises doubts over the safety of investors’ deposits and if custodians and exchanges are funded appropriately. It remains to be seen if the ripple effect from FTX will spread to other exchanges and custodians. How much FTT is out there that is now almost worthless that someone was holding as collateral? Any exchange or custodian that is securing customers' deposits in other cryptos may come under fire. Can we trust crypto? This is the million dollar question. FTT was trading at roughly $25 in early November, by November 8th it was trading between $5 and $6, and by November 12th was under $2 where it stands at the time I write this. Well established coins like Bitcoin and Ethereum are much less likely to collapse in value but there are thousands of other coins out there that are either lightly supported or have an unknown purpose. Cryptocurrencies are very different from stocks. In theory, the value of a company’s stock is tied to its financial performance. You are paying for the future profits of the company so the better the profits, the higher the price, and vice versa. Crypto coins on the other hand can be used as a form of payment but also serve a function such as facilitating contracts or holding digital records for health care and other transactions. From an investor’s perspective, the question is how much do you pay for a given crypto coin as an investment? We can measure a stock price by the P/E ratio (the price of a stock divided by the earnings per share) but how do you measure the value of crypto? A crypto coin isn’t valued by a company’s profits, instead, it is based on how much someone is willing to pay for the scarcity of a coin or the utility the coin can provide and that is very difficult to quantify. Supporters of crypto will say this is the result of a single bad actor. But there have been several of these bad actors now recently. Just this past May, we had the collapse of LUNA and Terra coin resulting in a $60 billion crash. There is increased pressure now on other exchanges to prove they have the proper reserve amounts to secure customer deposits. The reality is until the SEC or FTC comes in and provides some oversight in the space there will be doubts and a cloud will hang over the custodians/exchanges to prove they are on sound financial footing. The oversight that is needed though runs counter to crypto’s mission to become a decentralized financial system disruptor. Hence, is this the end of crypto as we know it? Time will tell if crypto can properly self-police and continue as a new financial system, if it can continue with oversight to still be a way to revolutionize the financial industry, or if the oversight needed to make the space safe for consumers and investors tears apart the very fabric of what crypto envisioned it could be. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Social Media and Your Finances
There was a recent article I read that asked if you get financial envy. I thought this was a great question and one that I wanted to comment on more than just in a tweet or a Facebook post. Most of us are on some sort of social media platform where we either post pictures and provide updates on our lives or we just occasionally check in to see what our friends/acquaintances/co-workers are up to. Whether we use Facebook, Instagram (owned by Facebook) or in the case of our children, TikTok, the way the message is delivered may be different across platforms but the end goal is the same, there is something in my life I want to share with you. Again, in the case of TikTok, even if this just means sharing 10 seconds of dancing and lip synching to a song. Many studies have been done about the harmful effects of social media on our mental well being. I am not here to rail on social media as a whole and say there is no redeeming value. There are plenty of people in my life that I care about on some level but am just not close enough to on a frequent basis where I can stay in the loop on their lives. Social media provides me a way to know something about what they are up to. It also provides us a way to communicate to a much wider audience in one shot than what was ever available to us before. And for that, there is value. We can have a whole other conversation on whether the darker side of social media makes the overall net experience a positive or negative one, but that is for another time and place. I am pretty sure the Psychology 101 class I took in college in the fall of 1989 does not qualify me as an expert on what social media does to a person’s mental well being so I will not attempt to engage in that discussion here. Where I do have some degree of knowledge is people’s personal finances so we will focus on that. Now while we may not have professional psychology degrees, financial planners need to understand how people feel about money because there absolutely is an emotional component to our individual relationships with finances. This can be very tricky. Some of us have budgets, stick to them, understood the value of saving at an early age, and are in good financial shape. Others struggle with money. They don’t know where their money goes and as a result they may have debt and/or are not where they want to be financially. And there is everything in between. The tricky side with most of our consumption of social media is that it shows people in their best moments. Nobody posts pictures of themselves on a Tuesday night doing laundry, doing the grocery store/Target/Costco runs, doing yard work on a Saturday afternoon, sitting on the couch and watching Netflix or scrambling to get home from work in time, being forced to get your kid dinner thru a drive thru as you try to get them to whatever practice or activity they have that night. Instead, for the most part, we see three main types of posts: celebrating our kids, showing off our pets, and highlighting our life celebrations like vacations and gatherings with friends and family. So how does this impact our finances? This is where the financial envy can come into play, although there is likely minimal financial envy coming from posts related to pets. This is essentially the “keeping up with Joneses” syndrome. The trap is you start thinking, why don’t we take fabulous vacations? Why don’t we go out for expensive dinners with 12 of our closest friends? They look amazing, I need clothes that look like that. Whatever it may be, there is the appearance that they have the money to have experiences and material things that you don’t. The knee jerk reaction might be to start thinking you need that big trip, boat, new house or go on a shopping spree but where does that leave you? Here are some things to think about if you start feeling financial envy. 1. We’ll start with the big one. Your life is your life and you need to focus on what brings you joy. As an advisor, I think my ultimate goal is to help put you in a financial position where you can live the life you want. It is up to you to define what that life is and everyone’s vision of that is unique. We all have our own histories, life experiences, family, health situations, and interests that shape what we want to do and what makes us happy. Focus on the top 3-5 things that will bring real joy to you and target those. Others will have different things that make them happy. That’s fine, let them pursue those things and be happy for them. You do you, and focus on the joy, fulfillment, and satisfaction you take from your things. Don’t worry about putting resources into number 18 on your list because it looked cool on someone’s Instagram feed if that prevents you from achieving number 3 on your list. When you look back at things it likely won’t have mattered to you if you didn’t get to number 18 but you might kick yourself and have regrets for not doing number 3. Also, know these goals might change at different times. For my wife and I, we are at that stage where our parents are thankfully still alive but the reality is they are aging. Our parents are spread across the country so while we really enjoy traveling, how we travel over the next few years will likely look a little different as we want to make sure we get to spend quality time with them while we can. We just went to see my mom earlier this month. There were no fancy dinners where we are all glammed up, no big events we went to. We hung out, watched a movie each night, went for walks and talked, and just enjoyed being together. For me, that brings a ton of joy and satisfaction. We will go see my dad in a few weeks and my wife’s parents in December. I plan on playing golf with my dad as that is something we have always enjoyed doing. Someday we’ll get back to pursuing bigger travel goals but for now, this will be a focus because I can live with missing a long desired trip to Ireland but I know we would really regret missing this time with our parents. Ireland will still be there when I’m ready. 2. You have no idea what someone’s real financial circumstances are so don’t get worked up about what they have. There is always that question about how well we really know someone, if at all. We know very little about what is really going on with our friends from high school, college, or work, especially with their financial lives especially since it’s through the prism of what they allow you to see on social media. One of the lines my wife and I liked to use with our daughter when she was growing up and would talk about the cool stuff a friend might have was, “You don’t know if they have more money than us, they just spend more than we do”. That wasn’t meant to imply that we were better than others somehow or that the person she was referring to was somehow wrong for spending more. The point was that just because they have a newer house, nicer car or some other cool thing doesn’t mean automatically they are in a better financial position. It just means they have decided to spend money on certain visible things. We don’t know what people’s salaries are, how much they get in bonuses, or if they get stock compensation. You have no idea if they can actually afford that fabulous vacation. Do they have extra money because they aren’t saving enough for retirement and plan on working until age 72? Are they banking on money coming from mom and dad? Do they have an amount of debt that would cause you to lose sleep at night? Maybe they made a series of great investments and can reap the rewards. Maybe they do make a big income afford all of it. Good for them if they can. That dinner at the expensive restaurant, maybe that was a work event they didn’t have to pay for. You just don’t know. An example of this for me was right about a year ago and it combines this and the previous point. My daughter was a freshman in college and all the parents were flooding social media with posts about moving their kids in, how proud we are of them, how we will miss them and they inevitably included pictures of the kids on beautiful campuses and some that were very expensive schools that were beyond what we felt we could afford. Now here is the thing. I have no idea what each of those families’ plans are to pay for college. Maybe they have the money, maybe they got big scholarships, maybe they are taking out big loans. I have no clue so it’s not worth second guessing if my daughter should be at that school that’s $10,000 to $20,000 more per year because other kids are. Saving for college was very important to my wife and I. Early on we established a target and planned over the years to be able to meet our target. Did the amount we had to save over the years cost us the ability to go out for some of those dinners, buy more expensive clothes, have a nicer car? Yes, it did. But for us, we take deep satisfaction that we were able to meet that goal and the fact we were able to provide our daughter with options we didn’t have at that age was well worth it. You can’t control what other people do with their money and you likely don’t know if they are even making good financial choices or not. Just focus on your own goals and doing what is right for you and your family. 3. Remember that you are seeing a composite of many people on social media. You may be able to scroll through 50 different social media posts in a 15-20 minute browsing session. So while you see this collection of people doing these wonderful things remember that each of them is doing those things once. It gives the appearance that everyone is living the beautiful life. But what you really saw was person A out at dinner, person B with their friends, person C on vacation. Maybe that dinner was all person A has done for a while. Remember that they still have to do dishes, laundry, errands, house projects and kid’s soccer practices like you that fill the majority of their time. 4. You are almost guaranteed to lose when you start playing the comparison game. If you find yourself thinking, “Why do they get to do that and I don’t? I think we make about the same amount of money.”, be very careful. Think of social media as the Las Vegas casino and you are the hapless mark trying to figure out whether to place your roulette bet on 5, 12, or 24. The house will win in the long run. When you see a picture of someone on that nice vacation it is in a vacuum of other information. Again, you don’t know the details of their finances or how they prioritize their spending. Maybe they can afford that trip because they don’t mind driving older cars and instead of putting $800 a month towards a car payment they save it for travel. That right there is $10,000 per year someone might be able to spend on something. Maybe it is all on credit cards and they don’t know how they will pay for it. Maybe they just got a nice bonus at work. It is also very easy to quickly lose sight of the things that you do have. If you wanted the $800 a month car above, great. Just remember that car comes with a cost and maybe you can’t do the travel then. You may be directing more of your income towards retirement savings because you want to retire early. Maybe you just got your dream kitchen remodel and are paying off a home equity loan. All of these are choices which could you leave you with less discretionary income to have what someone else puts on display on social media. The risk is that you assume they have everything you do plus the thing you see on social media that you don’t. That is hardly ever the case. The truth is they have some things and you might have some different things. They can’t put a picture of their new kitchen if they don’t have one. They for sure are not going to post their smaller 401k balance so you can feel better about your retirement savings. We all make choices with what we spend our money on. Be it a house, cars, travel, kids activities, eating out, clothes, financial goals, etc… and we all make different choices across the board given where we are with our lives and what we value. So please don’t assume that the person you used to work with has everything. Likely they have just made different choices and that’s okay. It’s okay to re-evaluate your choices but once you are good with those then move on and don’t worry about what someone else is doing. 5. This is really kind of a continuation of the first point listed above. Remember that the things that bring you joy and satisfaction are just as worthy as what brings someone else joy. Not all of our goals result in great photo ops that we share with the world. There is no right and wrong with what brings you joy (assuming we’re not talking criminal activities) as compared to someone else. You may want to retire early, travel the world and enjoy fine wines because you are curious about other cultures, foods, and the adventures of unknown areas, and well, you happen to like wine. You may want to work until 65, move to Florida and play golf because you want to be in the warm weather and golf has always been your favorite activity. You may want to buy a lake cabin and fish every day because you love nature and appreciate the peacefulness of the lake. You may love taking your kids to Disney every couple of years because you have a shared love of the characters, love laughing with the kids and have great memories from those trips. You may want to buy the big house so you can host large family gatherings because you have three kids, seven grandkids and love to have everyone together and cook for the family. You may place an emphasis on education and will make sure your kids can go where they want and then you want to be able to volunteer for your chosen organization once retired. You may love to read, watch movies and enjoy going to local breweries because reading stirs your imagination and you like the community aspect of the brewery. You may love exercise and want to be able to stay active by joining a bike club, playing tennis and going for hikes in the mountains. All of these are completely legitimate goals for you to pursue with your time and money and there are thousands more. None is better than another. You likely cannot tackle them all though, so the trick is identifying which ones mean the most to you and then having the discipline to stay true to those. They each will require a different financial and time commitment to accomplish. As I said above, if traveling the world is what really lights your fire then your financial plan should make sure you have the resources to do that. So, when you see a social media post and you start thinking you would like the new house, a vacation property or be able to join a country club if it can happen, is it worth it if it costs you your two week trip to Italy, an African safari, or overwater bungalow in the south pacific that you have dreamed of? That is something only you can answer. At the end of the day, your goals are about making yourself and the people you love happy. It’s okay to feel that pang of jealousy when seeing what an old college friend is up to. Just remember you are on a path that should be most rewarding for you and let everyone else do their thing. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
How Bad Is the Stock Market Right Now?
For those of you paying attention to the stock market returns over the past several months, you have likely seen your balances trimmed by a hefty percentage. Since the start of the year the Dow Jones is down 15%, the S&P is down 20% and the NASDAQ is down a whopping 29%. And those figures include a slight recovery at the time of writing this in the past week. Even the normal safe haven of bonds has taken a beating with long term treasuries down 20%. So just how bad are things? To put things in perspective let’s go back and look at the past couple of years as we have been in a very unique place in market performance due to Covid. While Covid started making the news in early 2020 it wasn’t until late February that the markets started to react. Looking at weekly charts, the S&P was at 3380 on Feb. 14, 2020. It had a slight drop the following week but then fell over 10% the week of Feb 21, another 7% two weeks later and then the bottom fell out with another 15% drop the week of March 13. In just five weeks, the S&P had lost over 1000 points, a 32% drop. That is a huge fall in that short of a time period. But I think we could all understand why this was happening. While the science still had a way to go we were seeing cases spread around the globe and countries were starting to shut down. No one really knew how bad this was going to be or how long it would last, and you have heard me say this here before, markets hate the unknown and this was a doozy. Markets tend to overreact to big news that rocks the status quo. Was 32% too much of a downside? Maybe. But very quickly the markets started to bounce back. A month after hitting the lows, the S&P was back up to 2835, an increase of 23% from the bottom and didn’t stop there. In fact, the market kept chugging along in a positive direction and by August had fully recovered. Now here is where we should have asked the question, does that make sense? Should our stock market really have been at the same place in August 2020 as it was prior to Covid? You could make the arguments that new technologies were being adapted at record pace to allow people to work from home, conduct commerce and interact with each other but there were entire industries that were completely stuck in the mud; travel, hospitality, entertainment, sports. There was nothing happening in these areas. Now here is the odd thing. The market didn’t just get back to where it was, it kept going and going and going. By early September 2021, the S&P sat at 4535, 34% higher than the pre-Covid peak. Can anyone really say we were in a 34% better position at that time than pre-Covid? I doubt it. But when things are rolling in the right direction, we tend to convince ourselves that it all makes sense and we ignore the warning signs. From an academic stand point the price of a share of stock is based on the future cash flow of the company. Refer to the chart below and you can see that historically the S&P has traded at about a 16 to 17x P/E ratio. This means that the price of an average share of stock costs 16 times the earnings of that share. That was until the end of 2014 when the P/E ratio started climbing steadily and we sat in the 23-24 range until we had a correction at the end of 2018 when it dropped back to 19. By the time Covid came around the P/E ratio was up to 26. Understandably, the PE ratio goes up and down with the markets so when the market dropped due to COVID so did the P/E ratio to 21 at the end of April 2020. We already discussed how the markets not only rebounded but went on a huge run through the end of 2021. The P/E ratio was all the way up to 46 by the of June 2021 and was still at 30 at the end of 2021, well above normal levels. Different companies and industries will have different values depending upon where they are at in their growth lifecycle, but this average has been a pretty decent standard for a while. What this can tell an investor is that if the P/E ratio gets above historical ranges that is an indicator stocks might be getting over priced and are due for a correction to get back in line. Likewise, if the P/E gets below those marks that can indicate a buying opportunity. With P/E ratios in the 30s it was a clear sign the market had gotten too expensive. Tech stocks which, in general, have a higher rate of growth will carry a higher P/E ratio with the thought that the company’s profits will grow into a reasonable P/E. Well, during the bounce back from Covid this theory was on steroids. We can all remember the darlings that benefitted from everyone staying at home during Covid; Zoom, Peloton and Docusign among others. Plus, you had tech companies that facilitated everyone working from home and allowed us to access things from the cloud. These companies saw P/E ratios in the hundreds and in many cases weren’t even profitable. In this segment, things had gotten completely out of control from a stock price standpoint Welcome to 2022 and the adjustment is in full swing. Many of those high flying tech companies that benefitted from stay at home are down as much as 75% while even mainstays like Apple, Google and Amazon are down 20% or more from their highs. We are back to a P/E ratio of under 20 as of this writing so have come more than full circle from where we were pre-Covid. It feels like the sky has fallen a little bit in terms of the market and many of our portfolios. But has it? Look at the chart below. The S&P ended May 2022 at 4132. That’s 750 points, or 22% higher than that pre-Covid Feb 14, 2020 number. Any reasonable investor would take that gain over a two year period. It feels hollow because at one point the market was up over 100% in less than a two year timeframe and has since fallen. So what lessons about investing does this cycle teach us? Many are the same that have been mentioned here before. 1. Have a diverse investment portfolio – Some areas of the market will get crushed in a downturn and others will do better. An investment portfolio that has holdings across the board is key to having access to those areas which are performing a little better. 2. Rebalance your portfolio – This keeps you from being too heavily weighted into an area that has great results. Having some high growth tech might make sense for your portfolio. Let’s say you targeted 10% of your portfolio to that segment and after the run up you were up to 20% in high growth. You then would have suffered a 30% loss. Instead, had you rebalanced from high growth to an underperforming area like small value when high growth hit 15% you would have kept your gains and then gone into another area that had growth when high growth had its troubles. In short, rebalancing keeps your diversified portfolio at proper levels. 3. Stay invested for the long run – This goes hand in hand with not trying to time the market. It is very difficult to know exactly when to move in and out of the different areas of the market. That is a full time job to know what to look for and even then you are likely to be wrong half the time. 4. Have a risk appropriate portfolio – This recent downturn should not be a major concern for those in their 30’s as there is plenty of time for their investments to recover. But for anyone within five years of retirement or already retired, this has likely been concerning because they need this money for their retirement in the near term. As you near retirement, it’s a good idea to keep a portion of your portfolio in cash-like safe investments so you can ride out these short term periods of volatility. That way you have the money you need for the next several years that stays safe while the rest has time to rebound. What do you do now? As with everything in financial planning it depends on your particular situation. For those that have a longer time horizon for their investments you are much more likely to be able to ride this out and wait for the market to rebound. That doesn’t mean you don’t need to work at it but by following the steps mentioned above you can keep yourself on track for the long run. On the other hand, if you need to tap into the money within the next few years, you likely need to take a different approach. Not that you run for the exits and pull your money out of the market, but you need to be aware of the risk within your portfolio. For example, a 30 year old might be able to let everything ride for the next five years but a 60 year old that retires in two years should have been diligent along the way updating their portfolio so they are positioned appropriately from a risk standpoint. As I frequently say with investing, the starting place is to know why you are investing and what your objectives are. Develop a strategy that is based on your goals, risk tolerance and other key life circumstances. Stick to this long term plan and don’t make wholesale changes every time there is a new shiny object or sign of trouble. Make the small adjustments as needed mentioned above to help stay on track. If your long term goals and objectives change then adjust your strategy accordingly. My guess is most of you reading this have felt pain with your investments so far in 2022. I am not here to tell you everything will turn around any day soon. Investing is fraught with this type of short term risk but also has consistently rewarded investors over the long term. We don’t know how much longer this will continue or if/how much lower things might go. Re-evaluate your plan and hang in there. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Price of Gas - What You Need to Know
Normally, I like to speak about traditional financial planning topics here to inform people but every now and then there is a topical issue that is getting enough attention it is worth commenting on. This is one of those times. We all have been feeling the pain of high inflation over the course of the past year. While prices on many products have been going up across the board the price of gas always seems to elicit a bigger response. The recent invasion of Ukraine by Russia has done nothing but accelerate those price increases. Many people are frustrated and there is a lot of blame to go around. Complicating people’s views and understanding of what is going on is that too many news outlets today politicize these events and push out cute soundbites that direct blame in a direction that supports their own narrative. The truth is far more complex than that. I will try to explain below the main drivers of how we got here, what is driving the price and what can be done about it. Along the way, I will address many of the talking points you may be hearing and discuss the impact they may be having. I am no expert on the oil industry so to help me out with this I turned to an old friend who has spent the past 25 plus years in the oil trading industry. His job is to understand every single factor that impacts the price of oil, the impact if one of the variables changes and to be on the right side of those price moves. There is no room for politics in this position. This is simple business and economics. The following comments are a summary of what he shared with me. The price of oil and therefore gas is a simple study in the basic law of economics: supply and demand. To understand how we got where we are now, we need to go back a few years. In late 2019-early 2020, most of the world’s major oil producers were running full speed. At this time, the price of oil sat around $60 per barrel. In early 2020, we were hit with Covid, and we had a massive change in one of the two supply-demand components. Demand cratered almost overnight. We found ourselves quarantined at home, not going into work, not driving around town because everything was closed, and not traveling either. The problem was we had this massive supply because everyone was running full speed on oil production. The price of oil went to negative $30 per barrel in April 2020. Tanker ships were stuck floating around the ocean filled with oil and nowhere to put it as all our holding tanks on land were full. There was nowhere to put the oil because so little was being used. Going back to our supply-demand model, the only way to get the price back to a reasonable level was to shrink supply to meet the demand level. With oil at such low prices, the oil companies shut down production, refineries where oil is turned to gas shut down, companies stopped exploring new areas to drill, and instead redirected their funds away from R&D, and instead paid down debt, bought back stock and increased dividends in an effort to keep their stock price afloat. The break even price for oil production is somewhere in the $40 per barrel range so there is little to no incentive to drill when prices are lower than that. We also need to remember this was not just a US phenomenon, this decrease in production was across the board amongst all oil producing nations. It took until January 2021 for a decent level of equilibrium to be reached. Oil was back to $50 a barrel, a level at which companies can profit and consumers get a reasonable price. Covid was still hanging over the entire situation though. We had worked through our initial over supply issue, but demand was still low compared to previous levels and production levels stayed relatively low as well. The price of oil continued to rise through 2021 and hit a peak of $80 per barrel in late October. You can see the historical oil prices on this chart here . This was mainly due to production still lagging but demand continuing to rebound slowly but surely. Once we largely got past the Omicron variant, we were back to pre-Covid levels of demand but our global supply still had not caught up which was why prices had gone higher. With oil prices already high we were dealt with the Russian invasion of Ukraine. While the US doesn’t rely that heavily on Russian oil (more details on that later), oil is a global commodity, and the world still needs its overall supply. The other thing commodity markets hate, just like the stock market, is uncertainty. The invasion brought up all sorts of new risks and the price of oil skyrocketed to almost $130 in early March. So how much oil was Russia really providing? The global demand for oil sits at about 100 million barrels per day . Russia was providing about 7% of the export market meaning if the world decides to forgo Russian oil, we have a shortage of about 7 million barrels per day. To get oil prices back to where they were we need to replace those 7 million barrels or decrease demand. US daily demand alone for oil sits at about 20 million barrels per day . If gas prices go high enough people will drive and fly less, they will decide to skip summer road trips and the demand will come back down. But we don’t know exactly where that breaking point is. Ideally, we don’t have to find out either. So that is a little history on the price movements given the supply-demand changes over the past two years. Now let’s get into some of those other factors that could be happening to change the supply-demand equation. 1. The obvious question is why can’t the US just produce more oil? According to my source, the US has the capacity to add somewhere between 800,000 to 1,200,000 barrels per day to their output using the current supply of wells. There really is nothing stopping our oil companies from increasing their production and they have begun taking steps to do just that. The reality is though that it could take 6-12 months for this extra supply to hit the market. It isn’t so simple as to flip a switch and a week later we have a finished gasoline product available to us. We also have that dreaded covid-related supply chain problem that is impacting our ability to do this. Oil companies, like everyone else, are short of workers and certain materials needed to drill. For instance, there is a shortage of sand which is a key component for drilling. Expect US production to increase but it won’t have an immediate effect on your gas prices. 2. What about those 9000 unused leases? The government has historically granted leases to oil companies to drill for oil on federal lands. All this amounts to is the right to drill on that land. Going back to what we discussed earlier about what happened to oil during Covid, the oil companies haven’t spent the money on R&D to see if these leases would even produce much oil. This is where politics enters into the equation. The Biden administration has been in favor of a clean energy agenda which has left the oil companies unsure of how smart it is to make the investments into exploring these leases. Publicly the administration has said they have the green light to drill but there is lingering doubt from the oil companies on the true level of support. Again, it would take up to a year for this oil to hit the market if these leases were to be developed. 3. Would the Keystone XL pipeline help? The Keystone pipeline itself has been up and running since 2013. This pipeline brings in oil from Canada and routes it to various areas of the United States. All told, the existing portions of the pipeline deliver about 1.3 million barrels per day to the United States. The Keystone XL pipeline was to be an addition to the existing pipeline that would have added roughly an additional 800,000 barrels per day from Canada to the US. The XL segment was to bring in a heavier type of crude oil which raised environmental concerns. The project was put on hold in 2015 by the Obama administration and revived by the Trump administration in 2017. Soon though the project was subject to litigation and got hung up in the courts. Eventually, the Biden administration struck it down and the company that was going to build it said they were canceling the project for good. I have zero knowledge of what the real environmental risks of this project were so won’t try to quantify that here. That said, my industry contact does think this was a mistake by the Biden administration and would have helped our oil supply situation. It is not clear if the pipeline had been allowed to move forward if it would even be operational yet though. Had it been up and running it would have only replaced about 11% of the shortage from Russia. So, while this would have potentially helped our current situation, it is not the magic bullet that some people are touting it to be. 4. Where can we get extra oil supply to make up for Russia? What happened with our oil situation in 2020 happened everywhere. All oil producing nations slowed way down and are still not back at their previous levels. OPEC has decreased its exports as well. My industry contact said OPEC countries could very quickly add about 400,000 barrels per day, Iran could add 1-3 million barrels per day over the next three to six months and between Saudi Arabia/UAE and Venezuela we could see another 1.5 million barrels. All of this combined with what the US can add gets us pretty close to replacing the 7 million barrels from Russia. Again, this won’t happen overnight though. It will take three months to start to see the initial benefits and could take up to 12 months for everyone to be running at full speed. So far though these other countries have been slow to respond. My source shared with me a point that doesn’t get mentioned often. An oil well is a machine and like any machine needs maintenance and upkeep just like a car. One of the risks is that over the past two years while some of these wells have been mothballed is that they haven’t been maintained. Remember that some of these countries have nationalized oil, meaning it is not done by private companies as we have in the US. Some of these countries may not have the financial resources to maintain their wells so it could take longer for them to get up and running and/or they may not be as efficient once they are running. 5. Why were we buying Russian oil to begin with? I have heard we were energy independent. There is a lot to this point. First, let’s understand how we define energy independence. If you mean we do not rely on or import energy products from other countries, then no, we were never energy independent. Even people touting the Keystone Pipeline are advocating for the US importing oil as all of that comes from Canada. This chart here shows the history of US oil consumption, production, importing and export levels. There was a time in 2020 when we produced more oil than we consumed and we became a net exporter of oil, meaning we exported more US produced oil than we imported from foreign countries, by about 700,000 barrels per day. That said, we continued to import oil the entire time from a number of countries. We were still importing almost 8 million barrels per day, so we never relied solely on US oil production to meet our needs. This chart shows our level of imports by country over the years. This also shows a measurable amount of oil imports from Russia beginning way back in 2002 and never really subsiding, and in fact, saw an increase starting in 2019. By far, our biggest trading partner is Canada with almost 40% of our oil imports coming from our neighbors up north. With regards to Russia, they are a very small player for US imports overall. Especially, we don’t use much of their crude oil as it is the typical thick black sludgy oil you think of, and we tend to prefer the lighter oil found in Texas and parts of Canada. That said, we do rely fairly heavily on Russia for a number of other petroleum related products as you can see here . These products tend to be used in mixing and added to other fuels to make our gasoline. While the US and our NATO partners may eliminate or cut way back on Russian oil imports, that oil will still find a way to be sold. Russia may have to sell it at a discount, but China will likely buy all they can and India has been reported to be buying some as well. Those two countries account for over 2.5 billion people so there is plenty of demand. The truth is oil, and its related products are truly global commodities. We rely on peace in the world to let free markets and trading partners work in harmony. Even when our production was at its highest, we still imported oil from all over. This is because it costs less to import oil from a foreign country in some cases than transport that oil from a refinery to its end destination within the United States. So, we may sell our product and ship it to South America but we buy oil from somewhere else because it can be delivered to the east coast at a lower total cost. We could do away with this global system, but it would result in higher gas cost and that is the very issue we are concerned with. 6. How about if we made the switch to clean energy? I think it is clear we are heading in this direction. While this topic gets highly politicized as well, there are many strong reasons to keep moving in this direction. There is an environmental need to do it, it allows us to use renewable sources instead of oil which will run out at some point (although likely not for 100 years) and moves us further in the direction of true energy independence. We don’t have to rely on another country to supply sun, wind, water or electricity to us. And, the truth is, many of the major oil producing companies tend to be viewed as bad actors on the world stage and it allows us to get untangled from that mess. But it will take time. In the US alone we consume 20 million barrels of oil per day. Each barrel contains roughly 40 gallons. That is a total of 800 million gallons per day. That is a huge process to turn around that level of consumption. If you want to make the argument that the Biden administration has been no friend of the oil industry and we are not where we should be with our oil production, then you can make the same argument that the Trump administration largely turned its back on the clean energy industry as well and we aren’t as far along as we should be with our clean energy production and infrastructure. Regardless of how you feel about that, we would still not be in a position from a clean energy perspective to replace those 800 million gallons of gas per day. That will likely take decades and massive amounts of investments in a clean energy network. The other issue we have with clean energy is that it still requires natural resources to produce the equipment needed to harness the source of the energy and make it usable. For instance, EV vehicles rely on batteries and these batteries use resources like nickel, cobalt, and lithium while semiconductor chips used to run the cars need neon. And wouldn’t you know, Russia is among the leading producers of Nickel while Ukraine is the dominant player in neon. If you’re worried about the cost of oil, you would be shocked to see what has happened to the price of Nickel since the start of the invasion. While clean energy is the direction we are headed, it will take time and further developments, so we don’t just trade a dependence on oil for nickel and neon. 7. So why did gas prices go up so quickly when oil prices increased but didn’t really change when oil got cheaper? For those of you paying attention, the price of oil came down from its high of $130 per barrel all the way down to under $100 on March 16th. Blame your local gas station for this. Gas at a gas station is a very low margin business. When the price of oil increased quickly we saw the price of gas go up in lockstep. That price of oil is tied to the spot price for a barrel purchased at that time. The gas that was in the tanks at your local gas station had already been purchased at a lower price but they increased the price immediately so they made a nice profit off that. On the flip side, when oil fell by 25% to $100 per barrel we saw the average price of gas decrease by just 1-2%. What happens within the local gas station market is that each station bought their gas potentially at a different time and a different price but they all have to sell at pretty close to the same price or people will just go to the lower priced station across the street. When one station is able to purchase their gas at a lower price and lowers their price to the consumer then all the other stations lower their price as well even if they bought that gas at a higher price. As a result, the local gas stations take their profits when there is a window to do it. 8. So what can the government do now to help? My source indicated that there isn’t much they can do to move the needle very far in the short term. One thing he mentioned and is something I had not heard of was that they could relax the rules on the various grades of gas. Each state can set its own specs for various grades of gas which ends up creating a large number of boutique gas products. This means the refineries have to create a number of unique products which increases cost and slows down the delivery of the various gas specs to their final destination. A waiver could be done for certain types of gasoline which would result in a more uniform gas product that could be distributed more quickly and help with supply. That is a not so quick run down of some of the various factors impacting where we are with the current price of oil and gas. You can go back quite a way with our US government decisions on energy policy and find that all administrations have probably made some decisions that have helped and some that have hurt our overall energy situation. There might be a tactical decision that works for now but hurts down the road or on the flip side, hurts now but is positive for the long term. For all of the various reasons laid out above, we are limited in what we can do to change the supply side of the equation in the short term. In order to change the price to be something more palatable, the change most likely has to come from the demand side. This was one of the drivers for the drop in oil price last week as Covid (still impacting things) related shutdowns in China were going to put a damper on demand. The other option for changing demand is that the price gets high enough that families start making choices that impact their usage. Do they not make the summer road trip? Do fuel prices drive airfares high enough that people don’t make a trip at all? Do workers decide to continue to work from home to avoid their commute? This is your most likely solution in the short term before oil production can catch up. Look, I’ve talked to a lot of people who are upset by gas prices and understandably so. We don’t have enough fingers to point at all the parties who share in the blame (Covid, Putin, every administration going back to Carter, all other oil producing nations, our own insatiable demand). The bigger takeaway though is the reality that the price of oil goes way beyond just what our government can control. There are hundreds of various factors and players that impact the supply and demand balance which determines the price of oil and gas. In a global marketplace, so many things get intertwined that when there is a disruption to the smooth flow of goods it can get very complicated very quickly. For now, it sounds like we likely will have higher prices for at least the next three months. By the way, the next similar situation we could face like this is semi-conductor chips that are used for the processing all of our computerized devices. 80% of this production takes place in Taiwan which could be in China’s sights. I hope that helps explain and brings some clarity to this complex issue. As always, if you have any questions, comments or concerns feel free to reach out or respond in the comment section. I am always interested to see what people have to say. 7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
Investing Risk vs Real Life Risk
We all know investing entails some degree of risk, but what do we really mean when we talk about investment risk, and how does that compare with the risks we take in our daily non-investing lives? When we think about risk in our to day to day lives it can have several meanings. Many of us may think about risk in terms of a negative outcome to a given event or it might simply be that an outcome is unknown. These day to day views of risk are both very applicable when it comes to investment risk, but let’s take a deeper look at that. The most straight forward comparison is risk being an unknown outcome. This doesn’t even have to mean the outcome will be negative, just unknown. Think about the things where this applies to in our non-investing life. Maybe you try a new recipe, get a new hairstyle, ask someone on a date, ask your boss for a raise or some other thing that puts you out of your comfort zone or has you trying something new. If it goes well, you get a nice win. If it goes bad, you may not like it, but the downside is generally limited, and you will recover quickly. Now, let’s think about risk that can result in a truly negative outcome. Risky behaviors and activities can possibly result in a big payoff, but the downside can be severe if it doesn’t work out. Watching the downhill skiing event last night in the Olympics made me think of the comparison. They were competing for a gold medal, the height of their profession, but a slip of a ski could cause a nasty crash resulting in a concussion, torn ligaments or even broken bones. Taking that a step further, think about skydiving. A successful jump can be a once in a lifetime thrill ride (at least it was for me) but if it goes bad the consequences are obviously dire. When it comes to risk in investing there is always risk of the unknown. About the only "risk-free" assets are cash and Treasury Bonds. Even these “risk-free” assets come with some risk. While the face value of cash is safe it can lose real value with inflation. Treasury bonds are considered safe because we can count on the US Government to pay the stated interest but fluctuating interest rates can cause the value of the bond itself to go up or down. When it comes to investing, we take a calculated risk when we purchase an asset. We can look at historical data and trends to tell us that stocks will return an average of 8-10% a year and bonds 3-5%. We know that the actual annual returns will vary though. Some years will be better, some will be worse. That is our unknown. We never know from year to year exactly what we will get. Depending on where you are at with your investing lifecycle these year to year fluctuations might be no big deal or they could have a very detrimental impact. This is a concept called sequence of return risk. A 30 year old investor has plenty of time to ride out these year to year unknown returns and can rely on the long term averages to get them where they need. A 20% market downturn next year likely doesn’t submarine their long term goals as there is plenty of time to recover. On the other hand, for someone who is one year away from retiring a 20% downturn in the market could be devastating. With proper financial planning though you mitigate this risk by adjusting your portfolio so a 20% market downturn doesn’t have as big of an impact on your personal situation. If your portfolio has the appropriate amount of risk, then the risk of unknown returns is hopefully similar to that of the minor risks you take in life. There might be a short term unpleasant impact but it shouldn’t really hurt you in the long run. We can see some parallels between the smaller scale risks we take in our life and investing. But what about the big negative outcomes. Usually, when people have big concerns with investing it is about losing all of their money, the equivalent of skydiving gone bad. I call this absolute risk, the risk of losing your money. The truth is it is very, very rare to lose all of your money on an investment. There are specific investments such as options where this can happen but the vast majority of investing is done buying individual stocks, mutual funds and ETF’s. The truth is these hardly ever go to zero. Enron is a classic example, and more recently Sears, but with Sears it was a slow death that was very easy to see coming. In the 2000’s we have had multiple instances where the market has taken a big hit. The dot com crash of the early 2000’s, the financial crisis of 2007-2009, the initial impact of Covid in early 2020 and, most recently, the tech correction of late 2021-early 2022. In all of these cases, broader markets fell at least 20% and as much as 40%, while individual stocks or funds may have been down by as much as 75%. For instance, a bank stock like Wells Fargo was down 75% from September 2008 to March 2009; Paypal is down almost 60% since September 2021, and everyone’s favorite Covid exercise fad, Peloton, is down over 75% in the past year. If you have suffered these types of losses, it probably feels like the equivalent of that bad downhill skiing wipeout. It’s not quite like the parachute failed to open but you are bloodied and bruised. You can recover with time, but it might take a while. Again, though with proper portfolio allocation these losses won’t hurt nearly that bad. Take, what has been happening in the market the last few months. Certain high flying companies in the tech sector have seen huge drops, like the one I mentioned for Paypal. Proper portfolio allocation and diversification results in a portfolio that is spread out among many different areas. To that point, the S&P 500, is down just 7% since the first of the year, XLF (the financial sector ETF) is up 2% year to date, and XLE (the energy sector ETF) is up 19% so far in 2022. Having a diversified portfolio can go a long way to reduce the pain that one part of the market is suffering. The primary way we measure risk with investments is volatility. Another way to think about this is the unpredictability of the investment returns. For instance, investment A has returned 30% over the past 5 years and if the annual returns are all in the range of 2-8% there is very little volatility. Investment B has returned 60% over the past five years but the annual returns range from -20% to 40%. This is deemed a much riskier investment even though the overall returns are higher. This is because we have much less confidence how that investment will perform year to year. This takes us back to our sequence of return risk. As we get closer to needing that money, we need to reduce the risk of the portfolio. There is a relatively easy way to see how volatile an individual investment is. By using a tool like Yahoo Finance, Morningstar, or any other brokerage site you can see the details of an individual investment like this image below. In the risk section, you will find a value for standard deviation. Remember your stats class from years ago? Here is a real world use of it. The lower the standard deviation, the less volatile the returns. Let’s be very clear. There is risk with investing. You can lose some of your money and you don’t know what your returns will be from year to year. But, by having a well diversified, risk appropriate portfolio you can enjoy the benefit of long term returns and avoid the parachute not opening.
3 Things You Need to Know Before Investing
We all know we are supposed to invest money to build our financial future. You can invest in many different types of accounts, types of investments, and then a nearly endless array of individual investment options. Each account type, each asset class, and each individual investment serve some sort of purpose in the investment world. While not everyone may understand all of the details around stocks, bonds, 401k, IRA, Roth, etc… we are familiar enough with them to understand we should be doing these things to some degree. How do you know which ones to pick? How do professionals know what to suggest to you?. In order to work our way through the decision tree to understand what investments make sense for you, there are three things that are fundamentally important to know before you begin investing. 1. What is your investment objective? Before investing any money, this is the first question you need to ask yourself. Very simply, what am I investing this money for? This seems like such a simple concept but is overlooked by so many people. Too many people want to get straight into the conversation about what stocks they should buy. Should I buy an S&P 500 index fund or that new ESG fund, is Apple still a good investment or should I go for Tesla in my Robinhood account? While these may be valid questions eventually, they should come much later in the process when trying to determine what to do with your money. Think about all of the different reasons we might save or invest money. Retirement, college savings, wedding, vacation, charitable giving, down payment for a house, rainy day fund, a new car, leaving money for your kids. You get it, the list goes on and on. Let’s go through some examples. If I understand that a client wants to save money for retirement that immediately focuses me on a certain set of retirement related accounts. Based on a client’s desired retirement age I can determine that the client is knowingly setting aside this money for a longer period of time. Now depending on other pieces of information such as employment situation, benefits, and income I can narrow down further to what I think the best account type might be (401k, IRA, Roth, SEP, Solo 401k, etc..). What if you use my Robinhood or similar brokerage account for this? A Robinhood type of account might come into play here too but probably only after I’ve exhausted what I can do with tax advantaged retirement accounts. The government has given us tax benefits for money set aside for retirement so why wouldn’t we put money for that purpose in those accounts? If I can avoid paying tax on the money now (like an IRA or 401k) that makes more sense than putting it into a brokerage account where I contribute after tax money and then get taxed again when I sell the investment. What if you use your savings account? With a savings account, we avoid the taxes on the back end but you just don’t get the growth that most of us need for retirement. Most standard savings accounts are paying a fraction of 1% right now. That money is losing ground right now to inflation. That certainly doesn’t work when we need that money to grow for our long term future. Understanding that we want that money for retirement drives a decision process that provides a clear benefit for us when compared to putting that same money into a savings account or brokerage account. That example seems pretty straightforward, right? How about a rainy day fund? Does that same retirement account work here? Most likely not. The point of the rainy day or emergency fund is that we need to be able to access the funds quickly to deal with whatever is going on. Getting money out of an IRA may take time and you will have to pay taxes on the withdrawal and possibly a penalty as well. This might be a better spot for a traditional savings account. How about If the client wants to save for their child’s wedding? Does the same account we used for retirement work here? Maybe, but maybe not. I’ll address the rest of this scenario in a later section. Understanding your investment objective is the first step to knowing what investment you should make. Without knowing this, you may not have access to the investment options you need for adequate growth, it might be tied up in an account you can’t access or you may have to pay a penalty to get the money. 2. What is your investment timeline? Put another way, when do you need the money? Once we have determined why we are saving or investing money we need to know when we need it. Think about the items listed above for why we save money. For some of these, we may need the money in a few months and others may be 40 years. This can drive several decisions for us such as account type and maybe the asset class we invest in. Let’s go back to our retirement scenario. Hopefully, you have already been investing in tax advantaged retirement accounts but what about the next step in the decision tree? Let’s say you are 58 years old and want to retire at age 60. That leaves you with a two year investment timeline. Do you want the money that you need in two years invested in something volatile like Bitcoin or a single company stock? Riskier assets tend to have higher returns in the long term but can be very up and down in the short term. You need to make sure that money will be there because you are depending on it. Two years may not be enough time for your investment to recover if something goes sideways. Now that doesn’t mean you can’t be invested in things like Bitcoin or own a volatile stock like Tesla for your retirement. They just need to be in the part of the portfolio dedicated to your longer term needs. You may benefit from the long term growth in money that can sit there for 10 years and ride out the short term ups and downs but overall have a higher rate of return over that timeframe. So what about our rainy day fund? The point of the rainy day fund is we don’t know when that rainy day will be. You may go to start your car tomorrow and find you need a major repair. Next week your furnace may go out. Your employer could do a round of layoffs this spring. Or maybe none of this happens for several years. We just don’t know. Because of that, we keep this money very safe, usually in cash or some sort of low earning account. Again, we may need access to the funds in the next day or two. Ok, then, what about your child’s wedding? We punted on that one in the first section. The answer may vary depending upon a number of factors. What age will you be when your child will likely marry? If you had your child under the age of 30 there is a decent chance you will still be working if/when they decide to take this step. As a result, planning on using your 401k money for this might not be the best idea. Again, risk of taxes and penalties. Having money in a Roth or a brokerage account might make more sense for this purpose because we make withdrawals without penalties to an extent. Now for the second part of the equation, we now know the account to use, but what type of asset should I invest in. If your child is 8 and you are really into planning ahead then you can be riskier with this as hopefully, you won’t need it for quite some time. On the other hand, if your child is 25 and is in a serious relationship you may need that money much sooner and may want to make sure it is in something more stable. Another way to think about investing timeline is how much risk can you afford to take? This is different than our next section, risk tolerance. You may be very risk tolerant and not worry when markets become volatile, but the bottom line is, when you need the money, it needs to be there and you need to invest accordingly. 3. Risk Tolerance This is simply the amount of risk you are comfortable taking. We use this in conjunction with the previous section’s topic, investment timeline, to determine the proper amount of risk in your savings/investments. To illustrate risk tolerance, let’s go back to our retirement scenario. We have already established that we have a 58 year old who is looking to retire in two years. We now know that the portion of her investments she will need in the next few years should be less risky because they are depending on that money being there for their living expenses. Does that mean we go aggressive with the rest of the retirement savings? Not so fast. Our near retiree will have gone through the dot com crash in 2000, the aftermath of 9/11, and the financial crisis of the late 2000’s. Living through these experiences impacted us all in different ways. Some gained confidence in the economy and the financial market’s ability to rebound and come back to new all time highs. Others were scared off and live with the worry that they might see their retirement savings go up in smoke or don’t trust the market. To be clear, there is no correct way to feel about this. There is no right or wrong approach to take. This is a completely individual feeling and needs to be considered when investing. Just because I have confidence that the market will rebound doesn’t mean you are required to feel the same and as a result, be forced to have more risk in your investments than you are comfortable with. Look, it’s one thing to say you don’t care when there is a one day 300 point move in the Dow. It’s another to stick to your guns when the market has 10 days of 1000 point plus swings like we did in early 2020 as a result of Covid or when the market was going down 40% in 2007-2008. These things can and do happen in the market. There is a real risk with investing and we need to be aware of it and you need to be honest about how much you are willing to take on. Going back to our near retiree, if they came out of those experiences feeling comfortable about market risk, we may be more inclined to put more risk in that portion of investments intended for longer term use. As a result, maybe they have some Tesla or Bitcoin alongside that ESG and S&P 500 fund as part of a diversified portfolio. We still would keep that portion we need in a few years less risky even if they are comfortable with the risk because, again, they need that money to be there. If, on the other hand, those past experiences gave them doubts about the safety of their investments, we would be inclined to make that longer term portion less risky. As a result, maybe we forgo Bitcoin and individual stocks and have more broad index funds, bonds or low volatility funds. Conclusion If you find yourself with $10,000 and are looking to invest, don’t just buy some stock in a brokerage account because you heard about it on tv or through a friend or feel like it has to go in a retirement account. Invest with a purpose. Think through what you want to do with that money, when you will need it and how much risk you are comfortable with. By addressing these three fundamental questions you can get a much better understanding of what an appropriate investment for you is. This may not get you all the way to picking a specific stock, mutual fund or ETF but should get you to the right accounts, asset classes and investment mix. To be honest, that’s probably more important than picking Apple versus Tesla. This is not intended to be taken as specific advice for an individual or a recommendation of any specific individual investment. Any investments mentioned in this post are for illustrative purposes only and are not intended to show approval or disapproval of those investments. Please contact a financial professional prior to investing to understand the risks involved and identify items that are appropriate for you.
How an ACT prep course can help you reduce the cost of college
This blog is a companion piece to the third and final installment of my discussion with Steve O’Toole of O’Toole Educational Services on how an ACT prep class can be of benefit. As we discussed in part 1 of our conversation, high schoolers take the ACT test to either enhance their odds at getting into the school of their choice or help to secure scholarships due to their academic track record. I do not claim to have any expertise as a college admissions expert, but I do work with families to help them find colleges that are a financial fit for them. This is where the ACT can be a valuable asset. To understand what an ACT score might be worth in terms of scholarships we need to first understand the different type of college profiles and how they award scholarships. One of the things that surprises many families is when their child achieves a high score on the ACT and doesn’t receive scholarships from every school they apply to. Each school has their own approach to attracting students and criteria for scholarships. There are many sources of scholarship money for prospective college students. First, there are numerous scholarships given by local organizations and these tend to be in smaller amounts. Next, there are scholarships given out through the university via departments or various memorial funds. These can be for large dollars but are usually awarded to a single student or at the most a select few and many come with a specific set of criteria to meet. I call these the “George Anderson memorial scholarships”. These might be awarded to a single student majoring in a specific field and meeting some other criteria. The ACT might help in getting these scholarships, but it has very hard to count on receiving any of these as there are so few recipients. By far the biggest source of scholarship dollars is awarded simply based on your GPA and/or ACT. Many schools even automatically award scholarships based on the student achieving certain thresholds. These scholarships can be worth tens of thousands of dollars a year, are available to many students and you can readily count on receiving them if you meet the criteria. Large state schools These are big public schools with enrollments in excess of 20,000 students. This group has a diverse approach to awarding scholarships. As I live in Minnesota, I will use regional schools as my examples. This category would include the University of Minnesota, University of Wisconsin – Madison, University of Iowa and Iowa State from neighboring states. Minnesota and Wisconsin don’t really play in the merit aid space except for the one off “George Anderson” scholarships mentioned above. On the other hand, Iowa State is generous with automatic merit aid awards ranging from 6 to 11 thousand per year. Thresholds based on GPA and ACT start as low 3.3 and/or a 24. The University of Iowa also has automatic merit aid but the threshold is much higher, requiring close to a 30 ACT and a higher GPA. Smaller state schools Schools in this group include the University of North Dakota, North Dakota State University, St. Cloud State, University of Minnesota – Duluth and Mankato, University of Wisconsin – Eau Claire, Whitewater, Stout to name a few. Many of these schools do offer automatic scholarships in addition. The general range for qualifying for these scholarships is a 3.5 GPA and 25 ACT. These schools have a lower cost of attendance than their larger school counterparts. As a result, the scholarships they offer are in lower amounts than the big schools. Here you might be looking at an award of maybe $2500 per year but the starting price for the school might be closer to $20,000. Liberal Arts private schools Schools in this category include the University of St. Thomas, Carleton, Gustavus Adolphus, St. Olaf, Lawrence University in Wisconsin amongst many others. These schools can also be a mixed bag when it comes to offering merit aid. Some are very stingy while others can be very generous. There are no published automatic thresholds for these private schools and they will tell you that they review each students application on its individual merits but at some of these schools an ACT score of 22 can be worth $20,000 per year and higher scores can be worth an additional $15,000. Elite schools This category goes beyond just Ivy League schools and includes well known schools such as Duke, Notre Dame and even certain state public schools like the University of Michigan, University of North Carolina, and University of Virginia. This is the category that results in the most confusion with families. These schools are very expensive and attract the best of the best students. Many families think that their brilliant student will get huge offers at these schools, but the truth is the exact opposite. These schools are in very high demand and every student is an academic rock star so they don’t have to offer much for scholarships. That is not to say these schools don’t make funds available for students. If you have a financial need these schools will be the most generous of any of the categories and some will meet 100% of your financial need with grants. How has the test optional movement impacted this? Prior to Covid there was a small subset of schools that had gone test optional. This means that the school doesn’t require the submission of an ACT test score to be a factor in either admissions or for scholarships. Covid resulted in mass cancellations of ACT tests across the country so many more colleges hopped on the test optional bandwagon for the 2021 admissions cycle. If you have a school on your list that is test optional the ACT score should be treated as one of the assets in your tool kit. If you have a score that is below the university average, then it might be in your best interest to not report it and rely on your GPA instead. Test optional schools will still award scholarships solely based on your GPA. Here is an example of how this worked out this past year: GPA: 3.7 ACT: did not report School A: 24 ACT and 3.0 GPA was $12,000; 26 ACT and 3.5 GPA was $13,000; 28 ACT and 3.7 GPA was $14,000 School B: 3.5 GPA was $6,000; 24 ACT and 3.3 GPA was $8,000; 26 ACT and 3.5 GPA was $9,500; 28 ACT and 3.7 GPA was $11,000 At school A the offer was a $14,000 scholarship based on the GPA even though the ACT did not meet that requirement. School B offered $9,500 even though the GPA alone would have qualified for a higher amount. Covid has thrown many unknowns into this process. Admissions for the fall of 2021 ushered in a new wave of test optional schools and scholarships based on GPA. It remains to be seen how this will work for the fall of 2022 admissions. Will schools stay with the test optional movement or go back to requiring an ACT score for scholarships? Summary Even if the test optional movement continues, it can be a good idea to take the test and see if it can be used as an additional asset. If the score can be used in your favor, then use it to your advantage. If the score isn’t an asset, then don’t use it and rely on hopefully a strong GPA. An ACT score can still be worth tens of thousands of dollars in scholarships. If you have a student that is close to a threshold for receiving merit aid or a larger amount of aid it can be a wise investment to pay for an ACT prep class like O’Toole Educational Services . A one time investment of less than $1000 may pay back over $10,000 per year. If you want help navigating through college financing and how much it is going to cost you to send your student to the schools they are considering contact 7th Street Financial and sign up for our College Planning services where we work with you to find colleges that will be a financial fit based on your budget and what you can expect from aid based on your financial situation and your student’s profile.
Is an ACT Prep Course Right for You?
Every year millions of high school students go through the process of applying for college to continue their education. Some will look at community colleges or tech schools, others will look to attend big state schools, smaller private schools or even elite Ivy league schools. Each of these types of schools comes with their own pros and cons and any one of them might be the best fit for a given student. One of the components of this process each year is the taking of ACT tests. These tests are used by colleges to help them with both their admissions process and doling out academic scholarships. I recently had the chance to sit down and talk with Steve O’Toole of O’Toole Educational Services about his ACT prep service. Here are some highlights from the first portion of our conversation. You can see the video here . Does the ACT even matter anymore with schools going test optional? Prior to Covid there was a small movement with some schools deciding to go test optional. This meant that applicants didn’t need to submit a test score as a requirement for the schools to consider in the admissions process. This movement accelerated in 2020 as Covid wreaked havoc with test scheduling and the ability for many students to take the test. As a result, many schools in the last year have dropped the ACT requirement for the 2021 admissions cycle. It remains to be seen how schools will adjust in 2021 and moving forward assuming that groups will be able to gather again for testing. Will the schools that made this change for the past year continue with that policy or go back to wanting to see an ACT score. One other thing to consider is that many schools may have been test optional only for the purposes of admissions but still wanted to see an ACT score for academic based scholarships. An ACT score should be considered one of the items in your toolkit when it comes to college. If you have a good score that will make you look more favorable in terms of admissions and scholarships, then by all means use it to your advantage and include it. If you don’t have a good test score, then don’t include it and rely on your grades and other items on your resume. Is an ACT prep course worth it? Studies have shown that an ACT prep course can help improve an overall score by 3-4 points. A lower score can be improved by even more. A 3-4 point improvement might be the difference between getting admitted into the school you want or not. It might also make the difference in qualifying for an academic scholarship that can save you thousands of dollars a year in tuition. As an example, at Iowa State University, a combination of a 3.30 gpa and a 24 ACT score will score you a $36,000 academic scholarship worth $9,000 per year. If you have a student with the required gpa and an initial ACT score of 22 an increase of just two points can be worth $36,000. Depending upon the review class you sign up for you will likely pay $1,000 or less. That is a pretty good return on investment. There is more coming from my conversation with Steve. Stay tuned for the next segment which will be released next week. If you want to see the entire video you can do so here .
3 Tips Women Over 40 Should Ask An Advisor
In the life of a person, 40 years of age is an especially important milestone. You are starting to think about your financial future and cannot afford to make the same financial mistakes that you made in your 20s. 40 years of age is also a milestone from the perspective of a woman because you may be raising your kids, taking care of your home, looking after aging parents, and managing your career. Indeed, women in their 40s, have no time to look after themselves! As a result, you may not have time to tend to your finances as they demand. That is why a woman in her 40s should consult a financial advisor regarding money and personal finance tips. You can have a look at what kind of financial help to expect from the financial advisor Before going into more detail about personal finance tips that you can ask a financial advisor, you can check out a few data points. AARP data says that only 39% of women are confident they will have enough resources to live a comfortable life for 25 years of retirement compared to 54% of men. That is not good from the viewpoint of a woman. You can take a look at how to be in a financially sound position in your 40s by taking assistance from a financial advisor. Tip 1 - Budget and Debt: Maybe, until now you have not given much thought to your budget. But now time has come to be financially conscious and think seriously about your budget. You can consult with your financial advisor and seek suggestions from the expert regarding what can be your ideal budget strategy in your 40s. Other than budget, the next important financial point, you can consult with your advisor is debt. Be it a long-term mortgage, high-interest rate credit cards, or emergency-basis-taken payday loans; none of it is good for your financial life. So, you can ask your financial advisor about ways to solve your secured and unsecured debt problems like mortgage, credit cards, and student loans. With the help of an expert, you can use several debt repayment ways like refinancing, debt management , etc to solve your debt problems . Thus, in your 40s, you are going to get the best personal finance tips over budget and debt from your financial advisor. These tips may prove to be highly beneficial for you. Tip 2 - Intelligent investments Creating a budget and safely repaying the debts by consulting a financial advisor is a great start but your relationship with the financial advisor does not end here. With the help of the financial advisor, you can make intelligent investment decisions that can help you in post-retirement savings and achieving your financial goals. Maybe, you are already making investments but the financial advisor can help you to make risk-appropriate, and goal-oriented investments. Tip 3 - Retirement taxes and college savings You may think that you are only in your 40s, why do I need to think about taxes in retirement? But, by thinking about it now you can avoid paying huge tax bills while in retirement. You may consult your financial advisor regarding what is the best retirement account for you. Is it 401k or Roth IRA? The difference between 401k and Roth IRA is in a 401k account you contribute pre-tax money. In a Roth IRA, you contribute after-tax money. Your money is going to be taxed when you withdraw your money from the 401k account. You can make a tax-free withdrawal from the Roth IRA account. Remember, it is important to make proper financial decisions in your 40s! So, after discussing with your financial advisor, you can decide what is the right kind of retirement account for you. In the same way, you have to think about the expenses related to your kids' college education now. There is a good chance that once you are in your 40’s, college will be in your child’s near future so you have to think about how to save for their college education now. With the help of your advisor, you can invest in a 529 college savings plan. The big benefit of the 529 college savings plan is you won’t have to pay any taxes on your investment gains if you use the money for qualified college expenses. Thus, with the help of a financial advisor, you can find the right way regarding how to save for your kids’ college education and how to deal with your retirement tax. These are the 3 basic personal finance tips you can ask your financial advisor. Final words, You have to perform a lot of financial tasks in your 40s Whether it is thinking about your kids’ education, planning retirement or managing your investments. Consult a financial advisor to help strike a balance between enjoying today and taking care of your future needs. Author Bio: Catherine Burke is a financial writer for https://www.onlinepaydayloanconsolidation.com/ . She provides information on successful cash loans and payday loan consolidation to help people get over a difficult patch. She lives in Kansas and has earned a frame in the matter of payday loans. 7th Street Financial is happy to provide an opportunity for a diverse group of finance bloggers to submit items for publication. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.
The Reddit Phenomenon – What You Need to Know
Normally I keep my blog posts related to core financial planning topics that can help you better understand the personal finance landscape but every now and then something happens that needs to be addressed. Over the past several weeks we have seen one of those examples, the Reddit short squeeze trade. This post will give an understanding to what happened, what it means to you and discuss if you need to jump into the action. To start, we need to understand what a short squeeze is. 98% of the activity in the stock market is people going long on an investment. When you buy a share of Apple or contribute to your 401k plan you are going long on those assets. You are buying a share at the current price in hopes that the asset price will increase over time providing you a gain on your investment. Shorting an investment is just the opposite concept. You do this when you think a particular stock or fund will decrease in price. This is normally done when someone thinks a particular company is in trouble or if they think a recession or other economic downturn is coming. To do this, an investor borrows a share of stock from their broker and sells it at the current market price but they are required at some point to purchase that share back from the broker. This type of activity is most frequently done by hedge funds and not individual investors. A short squeeze occurs when those that have shorted the stock feel pressure about their position because the price of the stock is heading up and not down like they had hoped. Remember, the person shorting the stock has to buy a share at current prices to make their broker whole. So the more the price goes up the more money the person shorting the stock is at risk of losing. This pressure can lead them to buy and cut their losses. In this most recent scenario, let’s look at what happened with GameStop (ticker GME). GameStop is a company that relies on physical stores to sell video games and related accessories. This was a solid business years ago but like what happened to Blockbuster when Netflix came around things have gone online and many of these games are now downloaded or streamed. GameStop has continued with its existing business model and as a result has seen a steady decline over the past few years in revenue and profits. Revenue is down almost 30% since 2016, net income has gone from $500 million in 2016 to negative in both 2019 and 2020, cash flow has gone from over $500 million in 2016 to a negative $250 million in 2020, and finally, this has led to a decreasing amount of cash on the balance sheet. The stock price has reflected this business downturn going from about $29/share down to $4 in the fall of 2020. This all points to a company that is in a slow death spiral. They have an outdated business model for their industry and declining business performance. This is the type of company frequently targeted by short sellers because unless the company overhauls their business it appears they will continue to slowly decline and eventually go the way of Sears and JCPenney. So selling a stock even at $4 and then buying it back at mere pennies results in a great trade and huge return for that investor. Now, here is what happened that makes this story fascinating. A group in the sub-Reddit community WallStreetBets got together and decided to go against these hedge funds and make some money along the way. This Reddit group is normally thought of as retail investors, in other words, non-professional investors. GameStop actually started ticking up in the fall of 2020 going from $5 to $19 by the end of the year. Then things got crazy. Below is a chart of how the stock has performed since January 11th. In that first week the stock went from $20 to $39, that’s a huge move for any stock in one week with almost a 100% increase. The following week saw the stock increase to $77, another 100% return. Then the week that made this a news story. By closing price: Jan 25th – 76.79 Jan 26th – 147.98 Jan 27th – 347.51 Jan 28th – 193.60 Jan 29th – 325.00 Those are absolutely crazy moves in a single stock in that short of a period of time. The stock actually reached an intraday high of $483 on January 27th. While GameStop had made a somewhat notable personnel move that might bode well for the company, the future prospects for the company did not suddenly improve by 1000%. This was move was not based on the fundamentals of the company. It was solely driven by an artificial demand intended to punish those who had shorted the stock. So how did the short squeeze work on the hedge funds? As the stock price went up some short sellers were forced to cover those borrowed shares and buy them back at current market prices which had gone to almost $500. This is obviously a huge loss as they had borrowed those shares most likely at a price under $20. Melvin Capital was the poster child for this as their hedge fund lost 53% of its value just in the month of January due to its 5.4 million share short position in GameStop. This loss totaled $6.5 billion for the fund. Not all hedge funds got beat up on this though. Senvest got in on the action and actually made $700 million. After the peak Now here is the thing with a bubble like this, it has to burst. Almost as quickly as the rise of the stock price was the collapse. As the price skyrocketed the new people buying in at higher prices were tying up more of their capital. The only way they can make money on their investment was for more new people to come in and agree to buy in at the artificially elevated or even higher price. Once that well runs dry the price starts to fall and it fell fast. Since the mania of the week of Jan 29th the stock has fallen back to $51, a drop of 89%. Who were the winners? Those that started buying the stock last fall as it rose to $20 and were able to get out during the huge push upward are the real big winners here. Even those that bought in on say Jan 25th or 26th and sold within a couple of days made a tidy profit. Lastly, and ironically, those who shorted the stock as it reached its peak did very well as within 10 days later the stock settled into a $50-60 range. Who were the big losers? As mentioned, Melvin Capital is the headliner of this group. Unfortunately, some of these retail investors were left holding the bag as they bought in at the peak, thinking the party would continue, only to see it break up much earlier than they thought. This was the dangerous part of this game. Like a Ponzi scheme, it works only as long as new buyers come in agreeing to pay a higher and higher price but eventually you run out of people to buy at a higher price especially when the stock price isn’t based on anything tied to the company’s performance. When people sold and took their profits the stock price dropped like a rock. Robinhood also falls in this camp. Robinhood is the preferred trading platform for this new wave of retail investors. The problem was they had issues dealing with all of the activity and halted trading of certain stocks when the mania was at its peak freezing out stock holders from getting out of their positions as prices were falling. They took a major PR hit but it remains to be seen if they actually lose investors off their platform. Did this impact me? Probably not. While this story got a lot of attention the companies involved are all fairly small in terms of impact on the overall market. So if you own an S&P 500 fund which is all larger companies there was no impact. If you owned a small or mid cap fund you may have seen a small impact as these funds typically hold hundreds or more individual companies within the fund and the movement of one company won’t have a material impact on the entire fund. Should you get in on future Reddit trades? While GameStop was the highest profile example of the power of the Reddit trade it was not the only example. There were others and will continue to be more. In fact, as I write this today there has been a major move pushing marijuana based stocks higher. To come out on the right side of this requires a good degree of market timing which is an incredibly difficult thing to do. You might catch the upswing and make money or get caught holding the bag when the euphoria wears off. And with the type of price swings we saw in GameStop those losses could be substantial. Just don’t make the mistake of assuming a given stock price will continue to go up as part of a movement. What do you do moving forward? If you have a long term investment plan that helps you reach your goals, stick with it. Don’t get thrown by the white noise these types of trades create in the news or get caught up in the rush of a get rich quick trade. Wealth is built over time, not in a week and these types of stories always have someone who is on the wrong end of things. The news will move on and you won’t hear much about the regular investor who lost $10,000 on GameStop because that doesn’t get anyone’s attention even though to that regular investor that $10,000 means a lot. This has been a fascinating story to follow and there will continue to be other episodes of this but none may quite grab the spotlight like GameStop did. I hope this helps you understand what happened, what the fallout was, and what it means to you. As always if you have any questions about your investments or others of your personal finances reach out to us at email@example.com or click here to schedule time to talk. All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.