SEPTEMBER 2021 NEWSLETTER


INTRODUCTION

We are pleased to bring you this Newsletter with significant information about forward-thinking shifts that are happening at Otto & Associates. The first two articles focus on these changes. We then have three articles on aspects of investing. One is a somewhat technical interview with David Booth, the founder of Dimensional Fund Advisors. We include it for those who are curious about why we have made Dimensional our primary investment fund family. Rest assured that there will not be an exam.

While the Booth article on investing makes reference to the way some people treat investing as a gambling endeavor, the next article presents a more thoughtful position on the difference between investing and gambling. In the third investment article we actually make a prediction about how the markets could perform going forward.

The penultimate article on charitable giving highlights the generosity of our clients, with some interesting statistics on a vehicle some O&A clients use to also reduce income taxes. We conclude with an article by Susan Otto Goodell, which gives a brief history of Otto & Associates, beginning in 1991.


 

O&A CHANGES LOCATION

After 25 fabulous years at 200 Katonah Ave., the O&A staff is in the process of finalizing a major shift to relocating our main office in Norwich, VT. It has been a multifaceted and challenging process, to say the least, but the future is bright.

The impetus for moving out of the office on Katonah Ave. was a direct result of changes we made during the (first) 18 months of COVID. A few months ago, all of the employees in Katonah (i.e., Deborah, Kathy, and Joan) proposed that they would like to continue working from home and that we close the office at 200 Katonah Ave. After a number of discussions, we all eventually arrived at the conclusion that leaving Katonah Ave. was the right decision.

Early in the COVID pandemic, as offices became unsafe and workers moved home, our genius computer consultant, Mark Kandle, facilitated setting up home computers so everyone at O&A was connected and could access information SECURELY from our home computers. A few years before we had implemented a computer-based phone system that let us speak to each other and clients from various locations. That was then expanded so all employees could simply move their office phones to their home location. As time went on, Mark has been able to complete additional home-office computer adaptations that support efficient, remote working for all staff.

With those pieces of the change in office location in place, other decisions followed. A number of years ago we converted all of our files to an electronic filing system so we already had the ability to remotely access information (e.g. tax returns, wills and other estate documents, etc.). A larger issue was where to put the seven s office computers accessed by individual members of the staff. Again, with Mark’s help, we saw that a small bedroom in the Ottos’ Katonah condo would work, and in early-August, those computers were moved.

Another big question was, where would Deborah, Susan, and David see clients in Katonah, and where would the Katonah staff meet when they were together? We entered into a discussion with our friends and colleagues at the Heckler & O’Keefe accounting firm. It turns out that they have a little-used conference room they are happy for us to use. You may recall that they are also based at 200 Katonah Avenue, but on the second, rather than the third, floor. As for staff meetings, they will likely occur most often at the Ottos’ condo.

September will be the start of these new permanent arrangements in Katonah, so if you are among our Katonah clients, we will look forward to guiding you through the new protocols, especially getting together in person, assuming the Delta variant does allow that. And of course, we will welcome your feedback as we get this part of our new arrangement through the transition.

Read on for new developments in Norwich, as we make that our main address and primary office space for the future, with Susan heading things up there with the help of Maria, our new employee (see next article) and David working in Norwich generally one day a week. David and Susan will continue their practice of coming to Katonah each month, except for the summer.

The Norwich mailing address continues to be P.O. Box 1203, Norwich, VT 05055. The new Norwich office is located at 289 Main Street. All phone numbers remain the same: (914) 232-5379 and (802) 649-1946. Both numbers ring at all phones in the system.


 

MARIA DANTOS JOINS O&A

Another delightful aspect of the O&A reconfiguring process has been the addition of an executive assistant at the Norwich office. Maria Dantos spent her first day at work in Norwich during the last week of June.

Maria, her husband, George, and their two children said goodbye to their lives in Manhattan because of the difficulties of COVID there and returned to the Upper Valley where Maria had grown up. George had already been working from home, so he was very flexible in terms of his job with Morningstar in Chicago. Some of you may remember that O&A has subscribed to the services of Morningstar for many years. Maria and her husband are delighted to have recently purchased a home in Norwich, which will entail sending her older child to the Marion Cross elementary school just across the street from the office.

Maria holds her Master’s in Education and has worked in corporate and nonprofit sectors. Before coming to O&A, she founded and directed a preschool in Manhattan which was acquired by a public company. As CEO in New York, she was able to use business management and administrative skills that she is happy to bring with her to O&A.

Please welcome Maria in person if you live near Norwich, or say hello over the phone on one of the times she answers your call. We are pleased to have her on the staff.


 

DAVID BOOTH, DFA

Recently David Booth, co-founder and Executive Chairman of DFA (Dimensional Fund Advisors) was interviewed by David Westin on “Wall Street Week.” One of the reasons we at O&A have invested heavily in Dimensional mutual funds is that they not only have a solid, conservative investment strategy, but they also do an exceptional job of educating both lay investors, as well as professionals in the field. What follows is an edited version of questions asked by Westin and responses by David Booth.

Question: After over 40 years of running DFA, what have you learned?

David Booth: During that time we have tried to separate the signal from the “noise.” The set of ideas we have built around the firm have shown that you can have a successful investment experience without having to forecast the market turns; without trying to outguess the market. A lot of that is tuning out the “noise” and focusing on what really matters.

You can’t control markets, but you can control the amount of risk you take. It is important to come up with a sensible long-term strategy. If you are going to invest in risky assets you need to have a long-term investment strategy - a strategy that you believe in enough that you can stick with it. Markets are going to go up and down and investors have to figure out how to deal with that uncertainty and come up with a sensible solution that they can stick with.

Q: How do you separate out what looks like gambling from normal risk?

Basically, trying to time short-term movements in the market is more akin to gambling than investing, and if you are going to invest in the market, you need a long-term focus. This last year, 2020, is a great example. The market was down 30% over the first few months of the year and a lot of people bailed out, but the market ended up 20% for the year. So if you tried to time the market and got out, you missed out on a big return.

Q: People are now talking about the possibility of runaway inflation. What do you do in a case like this? Do you plan for the worst and hope for the best? Do you change your strategy at all?

People talk about inflation but I don’t see too many of them saying, “I am really confident I know where inflation is going.” There are a lot of opinions floating around and that’s really the point. You can’t forecast these things and even if you could forecast where inflation is going, you don’t know what the effect is going to be on the stock and bond markets.

Q: When you began 40 years ago, did you simply invest in the entire stock market or did you lean a little this way and a little that way?

Research back in 1981 showed that over the long term, small stocks and value strategies did well. They had higher return with modestly lower risk. So, we have implemented a bias toward small and value, which doesn’t mean you win every year. But over the last 50 years, with these ideas, combined with lower fees, people should have a much better investment experience than they had 50 years ago. You can have a great career in finance and at the end of it all, feel good about yourself because you can help people. Going forward, if we’re going to help people out, part of the answer is we have to have better and safer financial services.

Q: What can we do to make offerings better and safer?

Our approach is to try to educate people. What is often called “noise” in the market is like a siren calling people to do silly things. Sometimes they win big; sometimes they lose big. And with lower fees, people are attracted to come into the market who would never have gotten in 20 years ago, which is terrific. Unfortunately, many of them have come in with the wrong set of ideas about how to invest. They think investing is gambling, which is the wrong way to approach the market.

Q: What do you make of some of the recent stocks that have shot up several hundred percent in a matter of weeks or months.

Investing in markets can cost people a lot of money as they get educated. They make foolish mistakes and have big percentage losses. Fortunately, people starting to invest frequently have very little money, and that is often a good thing because they can’t lose a lot if they don’t start with a lot. Overtime people learn there is no magic. What seems like magic is often just part of the “noise.” People think that there is magic out there. They may not have it, but somebody else does. “And if I could just figure it out then I would really be set.” But that doesn’t exit. There is no magic.


 

INVESTING VS. GAMBLING

It may come as no surprise that the Super Bowl, the biggest football game of the year, ranks as one of the most popular events to gamble on. The American Gaming Association estimates that over 23 million people in the US will wager around $4.3 billion on the big game. It may also come as no surprise that some of the money wagered will be lost. As the old adage goes, “the house always wins.”

Recent speculative events in the financial markets have provoked some to question if investing in the stock market is akin to that kind of gambling. (For example, the price of a company called Overstock increased more than 20 times in 5 months). While the stock market may have some similarities to gambling, such as the possibility of making or losing a huge amount of money, the likelihood of having a positive experience in the stock market is much greater than in traditional gambling, at least when you take a long-term approach.

When a mutual fund you own buys a basket of company stocks, you actually become a small owner in each of those companies and are entitled to a portion of the earnings and dividends. Stock prices fluctuate based on new information and the expectations of companies to generate profits. Prices, however, generally settle at a level that normally increases in value as time goes on. That is how you make money in the market. By contrast, when you gamble, money is simply transferred from one party to another and no added value is created. In addition, the odds are generally stacked against the players.

The table below illustrates the historical record of success when investing in the stock market, using the S&P 500 as a benchmark. Even over the shortest time period, one day, there has been a 56% chance of achieving positive returns. As you extend the time frame the probability of earning positive returns in the market increases.

As a gambler, the longer you sit in a casino, the greater the odds you'll walk out a loser; as an investor, the longer you stay in the stock market, the greater the probability you'll experience positive outcomes. Unlike with gambling, the “house” (i.e. the stock market) is on the investor's side when taking a disciplined, long-term approach to investing.

S&P 500: 1926-2020

Time Frame Positive
Daily - 56%
1 Year - 75%
5 Years - 88%
10 Years - 95%
20 Years - 100%

Excerpted from a Dimensional Fund Advisors “MONDAY MOVES”, 2/8/21.


 

WHITHER THE MARKETS?

Unless you are a new client, you have already heard us say repeatedly that in the short and intermediate term, we do not know how the markets will perform.

Right now, however, we will venture a different message. We think in the not-too-distant future, it is likely the markets will correct and fall some significant amount. Of course, we don’t know whether the next correction will be short, as we experienced earlier this year, or longer. We don’t know what the loss will be and to what degree it will alarm investors. The precise timing is unpredictable.

You should also know that we had some of the same thoughts a year ago, and the stock market has gained over 12% since that time. We are certainly pleased that we stuck with the allocation that each of our clients has, and we expect to do the same going forward. We will have our hunches about the market, but we do not invest on the basis of a hunch.

Lest you think this is a mixed message, let me be clear. The investment future is always uncertain because markets are uncertain – in the short run.

For that reason, we keep cash and cash equivalents in every client account. For those who are still accumulating money and rarely, if ever, withdraw money, we keep a modest amount of cash and cash equivalents for an emergency. For retired clients who take money from their account regularly, we keep approximately one year of cash or cash equivalents. That pretty much ensures that clients can survive a market downturn without having

A word about cash equivalents. Particularly in this environment, we choose to think of high-grade bonds as cash equivalents. Bonds rarely lose much money for an extended period when the stock market loses money, and typically increase at such times. That is because when the stock market goes down, investors might sell some or all of their stocks and the cash generated has to go somewhere. Typically, some significant percentage is invested in the bond market. That drives bond prices higher, which is why in a market downturn, bonds often make money. If clients need cash at such times, selling bonds is a viable option.

It should be noted that this stance, of holding cash and cash equivalents, has diminished the returns in client portfolios. That is the price for having a more conservative portfolio. Had all money been in stocks in recent months and years, returns would have been better. But we and our investors would not have had the “insurance” that allows clients to weather a downturn.

As you would expect, we will hold our course if and when there is a market correction, and we will wait for the recovery.


 

CHARITY

According to Giving USA, charitable giving in the U.S. is holding steady. In 2019, according to the most recent available statistics, Americans gave $450 billion to worthy causes. O&A clients are among this group.

Kathy Patton, in the Katonah office, recently dug out some interesting numbers having to do with our clients and the amount of money that went from client TDAmeritrade accounts to charities over the past two years. 2019 saw $498,858 leave client accounts to go to charities.

During 2020 giving was a bit higher when 33 clients gave to 130 organizations, a total of $519,257. With few exceptions, donations were appreciated stock, or charitable donations from IRAs. The appreciated stock came from individual or joint accounts. Gifts from IRAs may only be contributed from clients who are at least 70½ years old, but for that group, thi

s strategy is often useful in saving on income taxes. Of course, these numbers do not include money given to charities from client checking accounts. Our hats are off to all of you who have been generous to others in these challenging times.

We are happy to work with any of you in arranging donations from your investments. As we move, by fits and starts, into the post-COVID period, there are still an unusually high number of people who depend on charities for some kind of support and we urge readers to be sensitive to this fact.

When Mary and I moved to Shelburne, VT, in the midst of COVID, we did some research on organizations that were helping people in need. We discovered the Boys and Girls Club of Burlington and the way they helped kids who had family problems or other significant challenges. A number of the children they help are from immigrant families. As we have come to know the organization better, we have learned some dramatic stories, often directly (via Zoom) from presentations made by articulate kids themselves. We know firsthand how donating to such causes can bring a sense of satisfaction to the donor as well as the recipients.

 


 

A HISTORY OF O&A: SUSAN’S PERSPECTIVE

For many of you, much of this article will contain new information about the journey of David Otto and the O&A office. For some of you, parts of this article will be familiar. And for a small handful of readers, you will know the story from the beginning.

David started O&A in 1991 in an extra bedroom in the house that he and his wife, Mary, lived in at 136 Valley Road in Katonah, NY. A year before, he had heard about Fee Only Financial Planning and NAPFA (National Association of Personal Financial Advisors – the Fee Only Planners’ organization) and decided that it was the right career for him. He had been a minister and a pastoral counselor and enjoyed working with people. He also recognized that many of the challenges that people dealt with often had to do with money. Sometimes too little money, sometimes too much, and sometimes just not knowing how to deal with financial issues.

For the first year, after working briefly with another certified planner in the area and becoming a Certified Financial Planner (CFP), he founded O&A. At the beginning he did all the jobs – answered phones, conducted meetings, took notes, invested money, and marketed the business. After a year, he was busy enough that he hired a part-time secretary. Sometime later, there were enough clients that the family living room became a waiting room and both David and Mary realized that the upstairs office was no longer viable. O&A moved into 200 Katonah Ave. in 1997.

At the same time, the second financial planner, Deborah Maher, joined the team. While there have been two other support staff over the years, the current Katonah team has been together for nine years. (Kathy started working for O&A in 2007 and Joan in 2012).

In 2002, Mary retired from her teaching career and the two decided to move to Norwich, VT, to be closer to grandchildren. (Susan and her husband, Jeff, settled in Vermont in 1995.) David continued to work in Katonah and spent the weekends in Vermont. Of course, being in a new Vermont community meant meeting new people with financial questions and needs. As a result, David started seeing people in Vermont, and since he did not have an office there, it was back to client meetings in a home office.

By 2008, O&A had grown in both Katonah and Norwich, and David needed more help. At the same time Susan decided that she was ready for a career change and, after 15 years of being a third-grade teacher, went back to school to become a Certified Financial Planner. O&A hired her even before she received her CFP certificate.

Once again, the house was insufficient as an office, so Mary and David found a new house in Norwich that had an attached office with enough space for both David and Susan to work efficiently. Clients from the area came to the Vermont office, and David and Susan traveled to New York once a month to see clients there.

With the already reported changes for the O&A staff in Katonah, along with David and Mary’s relocating to Shelburne, VT, this summer seemed like the right time to move O&A’s main location to Vermont. We found a lovely office in Norwich and have added Maria to our team. The office is in an historic, former home in Norwich – the Burton House – and our new space is located in the front two rooms. Both rooms have fireplaces and beautiful wood floors. We have learned a bit about the history of the house from a Vermont client who grew up living there.

We hope all of you, whether you live near the former Katonah office or close to the new Norwich office (or elsewhere in the US or the world), will consider a visit to us at our new office in Vermont! Our street address is 289 Main Street, Norwich, VT. The invitation includes the possibilities of lunch at the nearby “Blue Sparrow Café,” a trip to the famed Norwich Bookstore, and – not to be missed – a visit to the Norwich General Store. The store is Dan and Whit’s, and their motto is, “if we don’t have it, you don’t need it.” We look forward to seeing you.