After a long period of calm, volatility may be back

Volatility Chart

Since the beginning of October concerns about signs of weaker growth abroad have outweighed positive US corporate earnings reports and global stock market volatility has gone extreme. The Dow Jones Industrials saw triple-digit swings several days in a row that wiped out all of the index’s year-to-date gains. This volatility sent investors once again seeking the relative security of U.S. Treasuries. As the price of the benchmark 10-year note has risen, the decline in its yield has accelerated in each of the last four weeks; the 10-year yield briefly dipped below 2% and is now around 2.14%. While the US equity markets have changed direction dramatically just since the beginning of the month, there is still reason to be optimistic.

Jobless claims decreased by 23,000 to 264,000 in the week ended Oct. 11, the fewest since April 2000. “This is a little bit heartening to remind everybody that the U.S. economy so far seems to be doing pretty well,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut.

Grounds for optimism also include the lowest unemployment rate in six years, a deleveraging of debt by companies and households and the likelihood of cheaper energy and low bond yields will support consumer spending and business investment.

“Things aren’t looking bad enough in the rest of the world to drag the U.S.,” said Peter Hooper, chief U.S. economist at Deutsche Bank AG and a former Fed official. “I wouldn’t say the world’s falling apart by any means.”

Covenant Trust believes that this current period of price volatility is not unexpected and while it makes for dramatic headlines — it is certainly not a reason to be getting out of the markets. Staying invested for the long term is the right course.

Covenant Trust Company Investment Department

Four simple ways to save

Jean Chatzky has four simple ways to help you save. Click on the image to see Chatzky’s article at

Jean Chatzky (financial editor for the “Today” show) thinks saving money is simple. At least theoretically. And theoretically, I agree. It’s like losing weight: if you want to drop a few pounds, you must burn more calories than you consume. Similarly, to save money, you need to make more money than you spend.

However, we all know that the reality of saving money is much more difficult. There are a variety of hurdles we may have to contend with: low income, emergencies, bad habits, a lack of self control, etc. But while these hindrances can complicate our financial situation, we need to remember that saving money is inherently simple. If we see saving as complicated, our methods for saving may become overly complex, difficult to maintain over a long period of time, and ultimately discouraging and ineffective.

Chatzky offers four ideas to help you save. Again, these may not be easy to do, but they are simple.  Continue reading

CTC tips: calculating debt

Calculating Debt

According to Nerd Wallet, the national average credit card debt is $15,607; the average mortgage debt is $153,500; and the average student loan debt is $32,656. Even if your debt isn’t as high as these averages, it can still wreak havoc on your finances.

Perhaps your debt payments are affordable. However, that doesn’t mean you’re in a financially healthy situation. Calculating your debt-to-income ratio (DTIR) can help you determine if you’re taking on too much debt. Your debt-to-income ratio is the percentage of your gross income that is tied up in debt. To calculate it, divide your monthly debt payments (mortgage/rent, student loan, credit card bills, etc.) by your monthly gross income and multiply it by 100 to get your DTIR as a percentage. So, if your monthly debt payment is $1,500 and your monthly gross income is $3,000, your debt-to-income ratio is 50% ($1,500/$3,000 x 100 = 50). Generally, anything over 36% is considered risky: a high DTIR will impair your ability to save and make it difficult to recover from a financial emergency.

Regardless of whether or not your DTIR is above 36%, total freedom from debt should be a financial goal. To start, make a list of all of your debt: their balances, interest rates, monthly payments, and due dates. Calculate how long it will take you to pay off your debts, and how much you will have paid in interest (you can find helpful calculators like this one online). Also note your annual and monthly income.

Making this list might seem like a small act, but it’s important to fully grasp the totality of your debt. Your debt can seem much more affordable when you’re only looking at your monthly payments; seeing the total numbers, especially compared to your annual and monthly income, can help you realize how big of a problem your debt is.

Risk and Return

Chart on Chalkboard

Risk and return – these are the basic concepts in the investing realm.  In order to achieve a greater return, the investor must be willing to take on greater risk.  We ask clients about their tolerance for risk, their ability to withstand the volatility and negative events that will come at some point. This is a tough one for any of us to answer or describe. No one wants to take undue risk with their hard-earned money, yet there is a fear of missing out on opportunities for gain.  It is important to understand as much as possible about the risks involved in investing, as, interestingly, understanding and being respectful of the risks creates a less risky scenario.

Howard Marks, the Chairman of Oaktree Capital Management LP, just this week put out a memo entitled Risk Revisited.  This is a detailed and interesting examination of risk that challenges some basic beliefs and reinforces others. A couple of the takeaways:

  • A widespread belief that “there is no risk” is the riskiest scenario.  When investors forget about risk and think there are only upside outcomes, peril awaits. Remember when real estate could never go down in value?  That tech stocks would only increase in value? Being risk conscious, performing extensive due diligence, being conservative in outlook and clear on the probability of outcomes is the better alternative.
  • The time to be conscious of risk is always. Given today’s low interest rate environment on the lower risk asset classes, we see money flowing into the more aggressive asset classes  as investors look for return wherever they can find it.  As prudent investors, we need to be even more so now as others leave caution behind. As Marks points out, we “move forward, but with caution,” emphasizing the caution side of the equation.
  • While we need to clearly examine the risks and control them to the extent possible, it is neither possible nor prudent to avoid all risk.  Marks makes clear that “risk avoidance usually goes hand-in-hand with return avoidance. While you shouldn’t expect to make money just for bearing risk, you also shouldn’t expect to make money without bearing risk.”

The study of risk reinforces that we cannot take all of the risk out of the equation. Outcomes are not predictable and the future is not knowable. We move forward with caution and with care.

How much credit card debt is too much?


credit card debt

Infogrpahic by Click to enlarge.

How much credit card debt is too much?

A few years ago, Mint asked people this question and published their results in an infographic (above). Almost half of the people who responded thought any credit card debt is too much. It’s not a surprising response: with the current average (i.e., not highest) credit card interest rate for someone with good credit at just over 17%, any amount of credit card debt can be expensive to pay off.

Thirteen percent thought anything over $5,000 was too much. At 17% interest and a 3% minimum monthly payment ($150/month), a $5,001 balance would take almost 4 years to pay off and a little over $1,800 would be paid in interest. Unfortunately, the average household credit card debt is more than $5,000 — $7,221 according to Nerdwallet. At a 17% interest rate, this could cost the cardholder almost $10,000 to repay.

So, what do you think? How much credit card debt is too much? Is it okay to carry a balance of a few hundred dollars? A thousand? Or is any credit card debt too much?