How to Budget for December Holidays in October

Your past holiday spending is the best indicator of what you’ll spend this season, says Robert P. Finley, a certified financial planner and the principal of Virtue Asset Management in Illinois.

“Try to get your credit card statements,” Finley says. “Try to look at your bank statements. What did I spend on presents? Did I have to do traveling? Did I have to fly somewhere?”

2017 Third Quarter Review

The strength of the stock market continued in the third quarter. The S&P 500 Index was up 4.48% for the quarter and 14.24% for the year. The strength in U.S. Large Cap as measured by the S&P 500 Index was driven by the S&P 500 Growth Index with returns of 5.29% for the quarter and 19.33% for the year. This compares favorably to the S&P 500 Value Index with returns of 3.48% for the quarter and 8.49% for the year.

The S&P 500 Index has significantly outperformed the S&P Mid Cap 400 Index with a return of 9.40% year to date and the S&P Small Cap 600 Index with a return of 8.92% year to date. Based on valuation, Virtue Asset Management continues to recommend overweighting exposure to Large Cap stocks compared to Mid and Small cap stocks. International Stocks have continued their strong performance of 2017 with a return of 5.35% for the third quarter and 19.94% year to date.

In a response to the financial crisis of 2007-08 the U.S Central Bank implemented several rounds of quantitative easing by purchasing fixed income securities composed of U.S Treasury and Mortgage-Backed securities. The U.S. purchased over $3 trillion of securities from 2008 to 2014 and has rolled over maturing securities – using the proceeds of matured securities to buy additional securities. This process has led the U.S. Central Bank to hold just over $4.2 trillion in fixed income securities. The U.S. was not the only central bank to try this policy. The European Central Bank, the People’s Bank of China and the Bank of Japan have purchased a mixture of equites and fixed income for a total of $15.1 trillion. Combined with the U.S Central Bank, the total assets purchased since 2008 are $19.3 trillion.

The result of Global Central Banks purchasing $19.3 trillion of assets is that they have lowered the supply of investable assets. This decrease in supply drove up the prices of fixed income instruments, which lowered the interest rates available on fixed income securities. The lower rates provided by fixed income securities encouraged some investors to rotate investments from fixed income to equities. In fact, the U.S. Stock market saw an increase of market capitalization of almost $16 trillion from 2008 to 2017

In September, the U.S. Central Bank announced the gradual unwinding of their $4.2 trillion fixed income balance sheet. The process will begin by not reinvesting maturing bonds. Starting in October, at an initial rate of $10 billion per month and increasing to a maximum of $50 billion per month in October 2018. At a rate of $50 billion a month or $600 billion a year it will take until 2025 to completely unwind the balance sheet. In fact, the Bank of Japan has been making purchases of approximately $50 billion a month. This makes it likely that the total assets purchased by global Central Banks could still rise over $19.3 trillion in the medium-term.

The S&P 500 has now gone over 300 days since experiencing a 5% drawdown during a six-month trailing period. There have only been four periods in history where more time has passed without a 5% correction. If the market can go to January without a 5% drawdown it will be the longest period in history. We continue to believe one of the major factors to the strength in the stock market has been purchases of assets by major Central Banks since 2009.

Investors are entering uncharted territory with the U.S. slowly unwinding their balance sheet. At some point the supply of investible assets will increase and some of the $19.3 trillion will have to be purchased by investors instead of Central Banks. The question is how much appetite is there for more investible assets? Is a trillion dollars enough to drive asset prices lower? Is it $10 trillion? At Virtue Asset Management were trying to create portfolios that protect on the downside and make sure our clients are prepared for a possible pullback during this monetary experiment. We continue to recommend clients review their exposure to growth stocks versus value stocks and that their stock exposure should be at the lower end of their acceptable range.

Tax Optimization

Tax optimization is an important portfolio management strategy that Virtue Asset Management implements. Proper tax optimization can take advantage of tax loss harvesting, allowing the donation of appreciated stock to charity and most importantly there is the potential for large tax savings during the life of the client and at death. In this scenario we will look at the difference between a tax optimized portfolio and a simple portfolio that is not optimized.


  • $2,000,000 example
  • Tax Optimized example portfolio has $1,000,000 in stocks in the taxable account and $1,000,000 in bonds in the tax deferred account
  • Not Optimized example portfolio has $500,000 in stocks and $500,000 in bonds in both taxable and tax deferred account
  • Equities appreciate at 5% a year in this example
  • Fixed Income appreciates at 2% a year in this example
  • This is a 15-year scenario
  • No assets are withdrawn over this period
  • Proceeds for the taxable account will be taxed at capital gains rate: 23.8% is the highest current long-term federal tax rate
  • The Required Minimum Distribution (RMD) will be taxed at income tax rate: 43.4% is the highest current federal income tax rate



  • In the Not Optimized example portfolio an investor will have equal amounts in both accounts.
    • The client will have $1,675,349 in the Tax Deferred Account
      • At age 70.5 the client will be required to start taking his RMD and in this example the RMD amount is $61,114.12
      • At the highest current federal income tax rate, the taxes are $26,536.55
    • The client will have $1,675,349 in the Taxable Account


  • In the Tax Optimized example portfolio, the taxable account ends up with the larger value because of the 100% weighting to equities
    • The client will have $1,345,868 in the Tax Deferred account
      • At age 70.5 the client will be required to start taking his RMD and in this example the RMD amount is $49,119.27
      • At the highest current federal income tax rate, the taxes are $21,317.76
    • The client will have $2,078,928 in the Taxable Account





In this example, if the client has an RMD in year fifteen the federal income tax savings between the optimized portfolio and the not optimized portfolio is $5,218.70 in year one. Even more savings will be achieved at death. After death, the tax deferred accounts will transfer to beneficiaries. The beneficiaries are required to take required minimum distributions based on their age and pay their federal income tax rate. The difference in ending market value between the tax deferred optimized and not optimized portfolio is $329,481 before taxes.

After death, the beneficiaries will receive a step up of cost basis in the taxable accounts. This means when they sell the investments, they will be taxed as if they bought them for what they were valued on the day the client died, not the price the client bought them for. In our example, the tax optimized taxable portfolio provides the beneficiaries $403,579 more in market value that would receive a step up in cost basis.

If the beneficiaries in this scenario needed the money from the taxable and tax deferred immediately the $329,481 difference in the tax deferred accounts would shrink to $186,486 after paying the maximum federal income tax rate of 43.4%. Fortunately, the tax optimized taxable account would pay no taxes. This leaves the tax optimized portfolio with an additional $260,585 for the beneficiaries the day after death.


Beginning Ending Taxes* Final
Tax Optimized
Taxable  $ 1,000,000  $   2,078,928  $                   –  $   2,078,928
Tax Deferred  $ 1,000,000  $   1,345,868  $      761,761  $      584,107
 $ 2,000,000  $   3,424,796  $      761,761  $ 2,663,035
Not Optimized
Taxable  $ 1,000,000  $   1,675,349  $                   –  $   1,675,349
Tax Deferred  $ 1,000,000  $   1,675,349  $      948,247  $      727,101
 $ 2,000,000  $   3,350,698  $      948,247  $ 2,402,450
*assuming the tax deferred account is completely liquidated and pays the 43.4% maximum federal tax rate





2017 First Half Review and Second Half Outlook

The first half of the year continued the seven-year bull market for stocks with the S&P 500 up 9.17%. Virtue Asset Management continues to recommend over-weighting US Large Cap stocks versus US Mid Cap and US Small Cap. This allocation worked well for the first half of the year with US Mid Cap returning 7.68% and Small Cap returning 4.99%. The first half of the year saw strong performance outside of the US with International Stocks returning 14.57% and Emerging Markets returning 18.8%. Fortunately, India did better than the Emerging Market Index and returned 20.19%.

The increase in the S&P 500 was powered by growth stocks and overall earnings growth. Earnings in the first quarter for the S&P 500 were $28.21 versus $23.97 for the previous year – an increase of approximately 20%. The S&P 500 growth index returned 13.33% for the first six months of the year compared to the S&P 500 value index that returned 4.85%. The strong performance of growth was helped by the 35% weighting in technology. For the first six months of the year the NASDAQ, which has a 44% weighting in technology, returned 14.07%.

The month of June saw a change in the trend as the S&P 500 Value Index returned 1.9% while S&P 500 Growth Index returned -.39%. Currently, the Price to Earnings (P/E) ratio on the S&P 500 Growth Index is 25.14 compared to the P/E ratio on the S&P 500 Value Index at 18.4. It is possible that June was the beginning of a rotation from growth to value. Historically, value has outperformed growth over the long term. As displayed in the above chart, the last 10 years have seen growth index returning 8.96% annually versus value index returning 5.24% annually. Currently, we favor stocks with value characteristics given the lower valuation and lower performance of value over the last 10 years versus growth. It is not uncommon for growth to significantly outperform value for select time periods. In 1997 to 1999 the growth index returned 34.76% a year versus the value index which returned 18.16% a year. Of course, that period was the dot com bubble and eventually that bubble popped. The annual performance of the value index from 1997 to 2006 was 9.08% versus the growth index returning only 6.95%.

It is important to understand the underlying holdings in a portfolio and the potential risk of these holdings. In the extreme example of the dot com bubble bursting from 1999-2002, a portfolio of 60% invested in the NASDAQ was riskier than a portfolio that was invested 100% in the S&P 500. From 2000-2002 the 60% Nasdaq portfolio would have been down 32% versus the 100% S&P 500 portfolio down 31%.

Virtue Asset Management is not a value only firm but our individual stock picks tend to have more value characteristics. When we invest in a stock we imagine that we are buying that company and try to model earnings growth to project how many years before we would receive our initial investment back and then earn a profit. When we look at a company such as Amazon we look at a market cap of $450 billion. In a simplistic exercise, versus our more complex model, you can calculate the average earnings needed to receive your original investment back before profits. For a company that is $450 billion market cap, to receive your initial investment back you would need to average earnings of $45 billion a year for a 10 year span. Last year Amazon had earnings of $2 billion. If you stretch the time horizon out to 20 years you would need a return of $22.5 billion a year which is still ten times the profit Amazon made last year. At Virtue Asset Management we want to own companies that have a shorter time horizon to return the individual investment and that don’t rely on such high growth assumptions. We believe these more conservative companies will protect more on the downside in the event of a market pullback.

Fixed Income continues to provide low but positive returns. The Barclays Aggregate Bond Index returned 2.42% for the first half of the year. The preferred stock index had a better performance and returned 4.51% for the first half of the year. We continue to recommend holdings in preferred stock for fixed income because of the higher dividend payouts. We don’t expect the Federal Reserve to raise rates to a level high enough that other products will compete with the four to five percent coupon that the preferred stocks are currently offering.
The strong earnings of the first quarter has raised earnings estimates for the S&P 500 Index in 2017 to approximately $128. At the beginning of the year we applied a P/E ratio of 20 to set the upper bound target for the S&P 500. Using the P/E ratio of 20 brings the end of year target of the S&P 500 up to 2560 for an increase of 5.6% from the end of second quarter level. If you use the 10-year historical average P/E of 17.14 and earnings of $128 you get a lower range scenario of 2197. This would be a decrease of 9.3% from the end of second quarter level.

This limited upside potential is one of the reasons we continue to recommend investor’s stock exposure should be at the lower end of their acceptable equity range. We also recommend that investor’s conduct an in-depth review of the holdings in their account to understand their exposure to growth stocks and the risks such exposure may carry.

NerdWallet: If at First You Miss a Financial Goal, Try, Try Again

missing-financial-goal“Once you’ve reached that goal, or more importantly not reached that goal, I really think it’s important to look back at the spending habits and trends over the time and compare it to the budget you set up,” says Robert P. Finley, a chartered financial analyst, certified financial planner and the principal of Virtue Asset Management in Illinois.

MarketWatch: Americans will talk about sex and infidelity before they talk about this…

This willingness to keep one’s personal finances under wraps stems from people’s embarrassment and/or social awkwardness around discussing money rather than something more nefarious, said Robert Finley, a certified financial planner and principal at Illinois-based advisory firm Virtue Asset Management.

What’s the VIX and Why Does It Matter to You?

Recently, the VIX has been in the news. The VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index. This index shows the market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The VIX index will also be referred to as the volatility index and sometimes the fear index. The reason that the VIX index is referred to as the fear index is that a higher number means the market is expecting a higher annualized volatility going forward.

The reason the VIX is in the news is that it is at very low levels. The month of May saw the VIX under 11. To put that low number in perspective, on March 9th, 2009 the VIX index was 49.68 and the S&P 500 Index was at 676.53. The trend over the last eight years has been an increasing stock market paired with a decreasing volatility index as seen in the graph below.

Despite the surprise events in 2016 of Brexit and the Trump presidency the VIX index continues its move lower. In fact, as of May 11th, 2017 the realized one month volatility of the S&P 500 index was 6.92. With the VIX Index at 11 it means the options market is pricing over a 50% increase of volatility over the next 30 days. This 50% increase means investors who are using options to hedge their portfolios are willing to pay a premium versus the recent volatility.

A result of this hefty premium is that some investors are selling volatility products. These investors will have profits if the realized volatility continues to be lower than 11. However, the average level of the VIX index is 19.67. A return to the average level would create large losses for current volatility sellers. These losses could be accelerated if everyone must sell at the same time. For some market historians, it reminds them of 1987 and the selling of portfolio insurance. Some people have blamed the forced computerized selling tied to portfolio insurance for the 20% drop of the market on October 19th, 1987. That day the Volatility Index increased from 36.37 to 150.19.  Virtue Asset Management believes some investors are too complacent and we expect volatility to eventually move higher. We believe the selling of volatility products has created the possibility of a coiled spring waiting to be sprung.

At Virtue Asset Management, we believe our streamlined structure that focuses on a smaller client base allows us to react quickly if the compressed spring of volatility uncoils. Our streamlined structure allows us to quickly adjust asset allocations for our clients. Contact us for an investment review of your current portfolio.