Which Documents Should You Keep & When You Can Shred Them

Jackie came across this article a while ago. It covers all the bases. If we could say it better ourselves, we would. https://www.dailyworth.com/posts/3513-when-to-throw-away-financial-documents.

While you're sorting through your files, determining what stays and what goes, keep us in mind. If you'd like for us to look over any documents, scan them into our records, or shred them for you, please feel free to drop them off at our office. Just give us a call first to be sure we haven't popped out for lunch! (601.991.3158)

We're happy to help you keep your files organized.

T+2 Settlement is Coming!

On Wednesday, the SEC announced settlement time for equities would be shortened from three to two days. In the vernacular, we are moving from T+3 to T+2 settlement on September 5th 2017. This is fairly exciting, at least for me. I hope my clients should appreciate it, even if they don't know that it is happening.

Briefly, settlement is what happens after a trade is agreed upon. Trades take milliseconds. You type in an order, say, buy 42 shares of VB, double check your work, confirm the order and hit execute. By the time you refresh your screen the VB is purchased. Your broker will show you the shares in your account and a negative amount by your cash. This negative amount will linger for a few days. Have you ever wondered why? Settlement time. The trade has been executed and everyone generally agrees that now you own shares of VB and the other guy has sold the shares. However, you still have to deliver the cash to him and he has to give you shares of VB in return.

I'll note here that this settlement schedule applies to equities and ETFs only. In general, the mutual fund settlement process is an overnight wire, CDs are specific to the date of issue and things like leveraged loans are a time consuming process involving a lot of fax machines apparently.

It makes sense that some time should pass before this all gets taken care of. It is cheaper, after all, for your broker to net out trades at the end of the day and send payment to other brokers, dealers and banks all in one package instead of millions of times a day. Currently, this process takes three days. There is no real reason it takes three days except that everyone really needs to be on the same page about it and take the same amount of time. This is being cut down to two days.

So why does that matter? How will it affect you?

For the end consumer, you may at first only notice that the annoying negative amount (of phantom positive amount in the case where you are the seller) of cash sitting in your account will not be there as long. Again, you will only have that accounting entry on display for two days before money actually moves out of (or into!) your account. This means that you can place another trade faster, have better assurance that the money will arrive and withdraw and otherwise use the money faster.

With shorter settlement times, for the same trade volume, there should be less debt in the trading system. This should make our markets more robust in times of stress, as there will be less worry about an individual or broker not being able to pay the money that has been floated to them. This is called margin trading.When a trade is agreed upon, the money is not exchanged immediately (see above description). Instead, a promise to pay is created - this is margin debt. Since trading is continuously ongoing, margin debt is proportional to the amount of trading multiplied by the settlement time. If settlement time decreases, so does margin debt. If there is less debt, trading partners can be more assured that they will be repaid and can have more confidence in trading during times of stress.

For the individual, this generally means that their broker will allow them to place trades quicker, as the funds will settle quicker.

Generally speaking, you cannot withdraw money from your account if it is not there. If the funds have not settled, the money is not there. If you have some spending that makes sense to come from an investment account, this is critical. Generally, you need money when you need it, but investment accounts will only give it to you three days later. Make that two days now and the process of getting your money back from investments just got easier!

Settlement is a background activity that affects a lot of aspects of trading. While the changes will be subtle, they are important, and should make the investing experience better for most end users, and the markets more robust for all participants.

The Little Girl of Wall Street

In a highly symbolic move, State Street Corp put a statue of a small girl in front of the famous Wall Street Raging Bull. In a more meaningful move, they announced that they would start voting no in director elections that did not have women on the board. State Street manages roughly $2.5 Billion in mostly passive index funds.

Index funds came about because people realized that on average, active selection by investment managers does not add value. If you can't pick out the best manager before they become the best, why not just be average. A assurance of the index performance is in many cases more appealing than a chance of outperformance plus the certain risk of a higher fee. Index funds track the index and minimize your fees - theoretically maximizing your expected value.

While indexing may be academically sound, it does not make for a very exciting investment thesis. Having a manager scour the earth for good deals or hidden gems sounds more intriguing. If your index fund cannot add value by selecting the next big thing, advocating for positive change at the companies in the index is one of the only routes for them to add value.

There is a gentle type of activism that every individual investor can practice, and that is voting. Every year companies (well, except Snapchat) ask shareholders to vote on a few issues, including who sits on the board of directors. While this is mostly dull and predictable, it is an opportunity to voice opinion. Individual investors can vote for a director that has been particularly good for the company, or vote against one they don't think is leading the company on the right path.

Holding a few shares out of millions does not really give you much say. State Street, on the other hand, owns a lot of shares. They own around 4% of many major companies like Apple, Kroger and GE. While this is not enough to have the final say, it is certainly enough to sway a close vote, and enough to start building momentum amongst other large shareholders.

A growing body of academic research points towards diverse boards making better decisions in the long run of the company. When you have people from different backgrounds approaching the same problem, you are bound to get more solutions to choose from. When analyzing risks that a company faces, this is even more important. Adding women and minority directors to a board should bring a larger pool of ideas to the table. With more ideas to choose form, you can find a better idea.

With index fund managers having very long time horizons (they must hold the stock until the company is booted from the index!) this alignment of interest makes sense. Board diversity is something that takes time to take root, and index funds have time to wait.

While this may be partly a marketing move on the part of State Street Corp, it may be a welcome trend that benefits investors more broadly.