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Election, Big Stocks, TD/Schwab Merger

October 06, 2020
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Good afternoon!

This week it felt fitting to offer just a little reminder about election-related investment decisions, as well as outline some of the dangers of chasing the performance of BIG stocks, and, finally, discuss the pending merger between Charles Schwab and TD Ameritrade. 

Enjoy!

Adam Harding

Advisor @ Harding Investments & Planning | Dave Ramsey Smartvestor Pro

Thing #1: More Election Prep

And just like that, 9 months down, 3 more to go. 

The next 3 months will certainly be eventful. Here are some highlights worth marking on your calendar: 

October 16th - Dictionary Day

On this day we'll celebrate the birth of American lexicographer, Noah Webster (yes, that 'Webster' from Webster's Dictionary). Celebrate by grabbing your favorite dictionary and learning some random words and definitions. (link)

November 26 - Thanksgiving AND Cake Day

You may have to also make cake to go with your pumpkin pie this year, because November 26th is Cake Day. Enjoy. 

Sometime in November or Early December - Proactive Tax Planning Meeting w/ Harding Investments

This isn't a national holiday (yet) but it's worth adding to your calendar. We'll be reaching out to clients next month to get our calls scheduled.

The purpose of this meeting? To address your tax circumstances thus far in 2020 and to discuss strategies we may be able to deploy beforeDecember 31st. Clients, expect an email from us with a scheduling link. Because taxes are one of the few areas we can actually control, as investors, this is a mandatory meeting (zoom, in-person, or phone call). 

December 10 - Dewey Decimal System Day

Commemorate the birth of Melville Dewey, the inventor of the Dewey Decimal System of library classification by..... um... surfing the internet for fun facts about old way we used to organize information. 

But let's be real for a minute, if you want to celebrate Melville Dewey on more than one day per year, that would be understandable and I'm not going to stop you. 

December 31 - Realistic Goals Setting Day

As you consider your new years' resolutions, let's use 2021 to get reallyrealistic. We all had a bunch of trips we wanted to take in 2020, or people we wanted to see, or milestones we wanted to achieve. It's okay if they took a backseat. Let's be sure to go into the end of the year with some appreciation for how plans must change sometimes and pat ourselves on the back for our resilience. 

Oh, and who could forget the BIG event on November 3rd?

Of course, I'm talking about Sandwich Day. 

From timeanddate.com... 

The unofficial holiday commemorates the birth anniversary of John Montagu, the fourth Earl of Sandwich. Rumor has it that the modern day version of the sandwich came about when Montagu's servants put some meat between two slices of bread as a way for the Earl to eat his meal while gambling.

Grab a sandwich and celebrate, you've earned it. 

... Okay, there are some other important ones too, and I know everyone is focused on the election and the myriad of pending crises that pundits from all sides are claiming.

As just another reminder, I'd encourage your investment decisions to not be political in nature. 


Here's some historical context: 

Stocks have rewarded disciplined investors for decades, through Democratic and Republican presidencies. It’s an important lesson on the benefits of a long-term investment approach.

It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But as nearly a century of returns shows, stocks have trended upward across administrations from both parties.

Shareholders are investing in companies, not a political party. And companies focus on serving their customers and growing their businesses, regardless of who is in the White House.

US presidents may have an impact on market returns, but so do hundreds, if not thousands, of other factors—the actions of foreign leaders, a global pandemic, interest rate changes, rising and falling oil prices, and technological advances, just to name a few.

(As always, past performance is never a guarantee of future performance)

Thing #2: More About Big Stocks

As companies grow to become some of the largest firms trading in the US stock market, the returns that push them there can be impressive. We've seen that in a BIG way in 2020 with the large tech stocks carrying the entire market forward through the coronavirus recession. 

But not long after joining the Top 10 largest by market cap, these stocks, on average, lagged the market.

From 1927 to 2019, the average annualized return for these stocks over the three years prior to joining the Top 10 was nearly 25% higher than the market (!).

In the three years after, the edge was less than 1% greater than the market.

Five years after joining the Top 10, these stocks were, on average, underperforming the broad market—a stark turnaround from their earlier advantage. The gap was even wider 10 years out.

Intel is an illustrative example. The technology giant posted average annualized excess returns of 29% in the 10 years before the year it ascended to the Top 10 but, in the next decade, underperformed the broad market by nearly 6% per year.

Similarly, the annualized excess return of Google five years before it hit the Top 10 dropped by about half in the five years after it joined the list. Expectations about a firm’s prospects are reflected in its current stock price. Positive news might lead to additional price appreciation, but those unexpected changes are not predictable.

Here is a graphic showing these figures: 

If you're like me, then you look at these figures and ask yourself: "How can I buy the biggest stocks in the future before they are the biggest stocks?" 

This is a fair question and there are smart people with limitless resources whose goal is to find these companies. Unfortunately, they repeatedly fail to consistently identify these big winners in advance. The only way to ensure you own tomorrow's big winners is to remain broadly diversified today.  

There will always be exceptions to the rule, and Amazon, Apple, etc. may end up being those once-in-a-lifetime exceptions. But it would also be foolish of me to not thoroughly understand the data when it comes to Investing in the BIG stocks... and the data is clear. 

Remember, someone once thought Exxon, IBM, General Electric or Enron were impenetrable. I don't want to make that same mistake in client portfolios....

(With that said, remember that a diversified fund likely has a lot of exposure to these companies, I wrote about this back in August)

... And if all of this is just too wordy and complicated, I understand (I tend to do that).

Here's a simpler version of my philosophy using Chickens as an example:

Let’s assume for a minute that everyone is given a chicken. This chicken can lay eggs.

People need to eat and chickens are the only source of food.

Some people butcher their chicken right away and enjoy a nice meal that keeps them full and happy for a couple days. But that nourishment wears off and afterward they are left with nothing.

Some people will let their chicken lay an egg every day and just eat that. They’re not as full and initially happy as those who ate the chicken right away, but it will keep them going until the chicken dies. Then they butcher the chicken, have a big meal, but eventually run out of food.

Then there are the people willing to sacrifice and go hungry for a few days early on. They don’t eat all of their eggs, they allow a few of them to become hatched chickens. Then those chickens grow up, hatch more eggs, and the process grows exponentially. Eventually there are chickens to lay eggs for eating, some for breeding, and some for butchering. Those hungry days at the beginning are tough, but they set the stage for a prosperous future.

From an investment perspective, here's how to look at this:

1) If you are given a resource (like a pile of money or your income), the sub optimal thing you can do is just start spending all of it right away (i.e. butchering the chicken).

2) The next best thing to do is invest your resource and distribute your returns so you can spend them (dividends, interest, rent, etc. = eggs).

3) The best thing you can do is allow your yield to become reinvested, which is the fundamental principle of compound interest (your chicken produces eggs that become chickens that produce eggs that become chickens, etc.).Then eventually when you consume some eggs and chickens, the amount is relatively insignificant and your chicken farm can sustain you. 

4) Finally, the people who understand how to optimize their resources will always understand this. All of our clients fall into this category. 

Lastly, what would a newsletter in October 2020 be without a related political stance...So here it is: 


Redistribution of wealth is not nearly as important as distributing the knowledge of the people who build wealth.

Don't give people chickens, teach people to be great chicken farmers.

Thing #3: Schwab & TD Merger

You may have heard that TD Ameritrade and Charles Schwab are merging....This is big news and I think it's a good thing. 

But first, a quick reminder around how firm's like ours operate.

Independent Registered Investment Advisors (like my firm) often custody client assets at firms called "discount brokerages" to maintain flexibility, low costs, greater objectivity, and enhanced service. Examples of these firms are Charles Schwab, Fidelity Investments, Etrade, Interactive Brokers, TD Ameritrade, and many more. 

When starting this firm, I leaned on my prior experience as an advisor operating on the Charles Schwab, Fidelity, and TD Ameritrade platforms. At my former firm I'd been responsible for trading accounts totaling more than $650m in assets across these three custodians, and it was clear to me that TD Ameritrade was where I'd be planning to launch this firm. In addition to their great technology offerings and trading platform, the decision of where should we hold client accounts comes down to a few core principles.

Here are some factors I'd considered: 

(the below is taken from the attached TDAI and You Brochure)

Account Security

With TD Ameritrade, your money is with one of the world’s largest discount brokerage firms, with local branches nationwide. With that comes a commitment to both excellent client service and account information protection. While no security system is absolutely impenetrable, TD Ameritrade has made substantial investments in security software, systems, and procedures—and is constantly reviewing, refining, and upgrading its infrastructure.

TD Ameritrade is a member of the Securities Investor Protection Corporation (SIPC). Securities in your account are protected up to $500,000, with a cash limit of $250,000. For details, please visit sipc.org.

Additionally, TD Ameritrade provides each client $149.5 million worth of protection for securities and $2 million of protection for cash through supplemental coverage provided by London insurers. In the event of a brokerage insolvency, a client may receive amounts due from the trustee in bankruptcy and then SIPC. Supplemental coverage is paid out after the trustee and SIPC payouts and under such coverage each client is limited to a combined return of $152 million from a trustee, SIPC, and London insurers. The TD Ameritrade supplemental coverage has an aggregate limit of $500 million over all customers. This policy provides coverage following brokerage insolvency and does not protect against loss in market value of the securities.

Clients receive a receive a clear, concise statement every month that summarizes all of your portfolio positions including all balances, dividends, and transactions. A duplicate monthly statement is also sent to your advisor.

Broad Investment Choices

In addition to account security, our preference for firms like TD Ameritrade is the absence of proprietary products which help us to maintain our objectivity. As an example, there is no "TD Ameritrade US Stock Fund" that I have any incentive to put clients into; this means that the sole determinant of investment merit remains "Do I think this is the best vehicle to accomplish what my client wants?"

(as a reminder, I also don't get any kickbacks or have any incentive to favor one investment over another.... Something that can't be said for all financial firms). 

TD offers access to a broad range of investment products and solutions to help us help you pursue your financial goals.

Size and Capability

As of 2017, TD Ameritrade had....

About 10,000 full time employees

$1.1 Trillion in Total Client Assets

11 Million Client Accounts

6,000 RIA firms like ours

When you work with an independent RIA, your advisor (us) must abide by the fiduciary standard of care — that means your advisory firm is required to put your best interests ahead of its own. I believe TD Ameritrade helps us accomplish that better than any big Wall Street name. 

... With that said, today marks the completion of an agreement to merge TD Ameritrade with the biggest discount brokerage, Charles Schwab. 

I'm excited about this. While TD and Schwab are both huge firms with extensive capabilities, the combination of the two firms should create an even more compelling offering. For one, I expect the adoption of all of the things I like about operating on TD Ameritrade's platform, as well as any advantages which exist on Schwab's platform. There should be more branch offices, continued low costs, and great service. 

Will there be growing pains in a merger of this magnitude? Perhaps, and there's been some speculation that the service to RIA firms may be impacted if the firm manages less than $25 million in client assets, I don't believe this will be the case, but this wouldn't apply to us as we're over $50m in client assets.

I will continue to monitor the merger, but I believe this only makes us stronger and more competitive in the markets, financial planning, and receiving service from the custodians we work with. 

Here is the text of an email notice that TD and Schwab sent out this morning: 

Today we made history. But it's your tomorrow we care about most.

For nearly 50 years, TD Ameritrade and Charles Schwab have shared a passion for breaking down the barriers to investing through a combination of low costs, great service, and innovative technology. Today, following the closing of Charles Schwab's acquisition of TD Ameritrade, we are two companies coming together with a single goal: to serve you.

For now, there is nothing you need to do. You will continue to work with your independent advisor and receive the same level of excellent service you are accustomed to.

The process to bring together our two firms is expected to take between 18 and 36 months. Until then, Schwab and TD Ameritrade will continue to operate as two separate custodians and the website and tools you are familiar with will be supported by TD Ameritrade.

We're confident that you will benefit from the combination of our two firms and we're proud to be able to work together with your independent advisor, to help you on your financial journey. You have our commitment to keep you informed throughout the transition.

Thank you for trusting us with your business. If you have any questions, please contact your independent advisor.

That's all for this week. Be well. 

Onward, 

Adam Harding, CFP