Major Decisions: Asset Allocation Daily

by: SA For FAs
Summary

Dan Bortolotti: Why is Fidelity offering its index funds for free?

Eric Basmajian: As long as growth continues to slow, defensive stocks will outperform.

Thought For The Day: Students mapping out their long-term careers must grasp reality and pursue an income at the same time they pursue a vocation.

Utilities And Other Sectors In A Slowing Economy

“Utilities have the best relative performance when growth is slowing. When growth slows, or the market thinks that growth may slow in the future, defensive stocks outperform, and utilities lead the pack being the closest sector to a bond proxy. Over the past three months, the three most defensive sectors, Utilities (XLU), Consumer Staples (XLP) and Healthcare (XLV) are the only main domestic equity sectors with a positive return. Housing (ITB), Banks (XLF), and Growth stocks (IWO) have fallen the most in the past three months.” (Eric Basmajian)

What’s Behind Fidelity’s No-Fee Index Funds?

“It seems likely that Fidelity is trying to take market share away from its competitors. Even though investors can already build a portfolio at a cost of less than 0.10% at firms such as Vanguard, the ultra-fee-conscious may be tempted to leave their current fund provider for a zero-fee option. And once these investors become Fidelity clients, they may be tempted to add some of the company's other mutual funds to the portfolios. In other words, free index funds are probably a loss leader.” (Dan Bortolotti)

Thought For The Day

Bankrate recently offered one of those fun listicles featuring “the most valuable college majors, ranked” based on average income and unemployment rate statistics. Except for zoology, which came in at No. 2 (average income $111,889 and an unemployment rate of 1.4%), there were no major surprises. The most valuable majors were practical things like (No. 1) actuarial science; (No. 3) nuclear engineering; (No. 4) health and medical preparatory programs; and (No. 5) applied mathematics. Among the least valuable majors listed were (No. 162) miscellaneous fine arts; (No. 159) cosmetology and culinary arts; and (No. 158) visual and performing arts. That composition & speech, and clinical psychology, also fell in the bottom five were minor surprises, to me anyway.

Lists like this serve to rekindle the classic debate as to whether a college major is a means toward acquiring career skills or whether it should be an arena for exposure to the ideas that have shaped civilization. In recent decades, the former seems to be far more popular, as reflected in the comments of public officials on the campaign trail, as when former president Barack Obama declared at a job training photo op: “I promise you, folks can make a lot more, potentially, with skilled manufacturing or the trades than they might with an art history degree.”

I don’t think a philosophical debate about which educational path one should take is all that necessary. It is known, or will eventually become clear, that people need to earn a living, so students need to plan for that. And all honor to those who want more out of life than just earning a living – they should simply exercise a great deal of caution in where and from whom they choose to acquire their life philosophy. But since our purpose is to address an important dimension of financial planning – namely, the human capital that fuels lifetime income – let’s just stipulate that employers are looking for skills, but those skills are not only those found on Bankrate’s Top 5 list of majors. Engineering and zookeeping are great professions, but even art history can provide tremendously useful skills in writing, analysis and visual discernment that employers require.

People naturally feel a pull in a certain direction, and it is fruitless trying to convince an art lover to study nuclear engineering in order to get a job. In addition to that pull, students planning for their future careers should also take inventory of their personal strengths and weaknesses. You may like art, yet have no natural ability in the craft of art yet great intellectual resources in its interpretation.

Once you’ve sorted those issues out, the next issue is the sort of investment you make for it. And here I’m not talking about financing a college education through stocks, bonds or funds but the extent to which a student is willing to do what it takes to achieve success. Becoming a doctor requires long years of training; sales requires a long process of cultivating relationships along a path that includes lots of rejection; becoming a musician, of course, requires practice, practice, practice.

The culture of our times places enormous stock in heroes, in the lofty positions reserved for the few. Yet the economy requires relatively few Major League Baseball pitchers, and relatively few art historians. Those positions will go to those who have honed the requisite skills and are most invested in those paths. Most everyone else will find employment in the more capacious areas of law, accounting, business management, architecture, computers, bookkeeping, graphic arts, social work and engineering. To most people, at least one of these options must sound more appealing than the rest, and it is critical that students mapping out their long-term careers grasp reality and pursue an income at the same time they pursue a vocation.

Employers ultimately care less about your major than about a relatively narrow (though highly specific) set of skills that falls out within one of several broad categories relevant to you: communications; creativity; problem-solving; teamwork; retrieval of information; analysis of information; presentation of information; empathy. Surely, one of these works for you. If you can choose one of these areas, drill down to a career path that matches your aptitudes and are willing to give it your all, then you can pretty much choose whatever major you want and set in motion an income for life.

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