Middleton Advisory Blog

The Right Standard of Care

David Middleton - Saturday, March 04, 2017

A friend recently hit me with this joke:

"Why did the hipster burn his mouth on the pizza? ...Because he ate it before it was cool."

Roaring laughter ensued.

"a person who follows the latest trends and fashions, especially those regarded as being outside the cultural mainstream."

Lately, financial advisors have been in the news because a new Department of Labor rule is bringing my preferred brand of advisory service into the mainstream. The fiduciary advisor.

A fiduciary advisor accepts the highest legal standard of care and must put the best interests of their clients above their own financial interests. And not just with lip service. A fiduciary is legally obligated to meet this standard and opens themselves up to liability should they breech their duty.  This standard isn't new to the industry, but it applies to well less than half of advisors.  The new Department of Labor rule says that any advisor to retirement assets must accept this standard of care.

As you might imagine, there has been a lot of push-back from Wall Street and the insurance industry about this new rule.  They may ultimately succeed in having it rescinded. You see, such a high standard of care makes unnecessary and expensive financial products rather dangerous to sell. However, many non-fiduciary advisors, perhaps somewhat reluctantly, are accepting the new standard and announcing that they too are now fiduciaries.

Personally, I have mixed feelings about forcing financial professionals to accept a standard of liability they aren't willing to take voluntarily. I'm really not sure that will entirely help investors.  It's also important to note that many professionals act honorably and ethically without being fiduciaries.  Finally, on a selfish note, this rule makes it harder for us "legacy fiduciary advisors" to differentiate ourselves from competitors, as we've been able to do up to this point. We've accepted this standard for years. Before it was cool.

Happy Investing,


Election 2016

David Middleton - Monday, November 07, 2016

[This is a record of a mass email and LinkedIN post I published on 11/ 7/16 ]

Hello everyone,

Well, this has been one for the history books.  If you aren't completely fed up with all things election related by now, then perhaps you might be interested to know how your money will be impacted by the results.  The short answer is that no one knows for sure, but there is no reason to be spooked and get off track.  Your investment portfolio should be diversified and balanced enough to hold the course, weather a few bumps, and still meet your goals. This election is just one of many inflection points in time that will impact our portfolios, so a drastic change in plan would not be appropriate. 

That said, I can speculate. The common thread is that a Trump win is less expected by pollsters and would be a surprise.  Since the market does not like surprises, generally speaking, one might expect a mild dip in the short term.  Following this logic, a Clinton win would have a neutral or slightly positive impact.  However, did you know that the stock market itself has shown some historically predictive abilities? When the market is down from July 31st to October 31st in an election year, as it is this election year, the incumbent party is replaced 86% of the time. Very unscientific, but perhaps investors wouldn't be very surprised either way.  We'll find out soon.

Professionally speaking, I believe that U.S. financial markets are more stable and efficient when citizens are engaged and participate in elections, so long as discussion is mostly civil and we try to understand opposing views.  Certainly there is room for improvement on that front.  I hope everyone has found time to do some research about their candidates, both national and local. 

If you haven't already, don't forget to vote!  


It happened.

David Middleton - Wednesday, July 13, 2016
Immediately following the news that Brexit had been approved, I sent out a communication to my subscribers. I think it makes a good blog post: 

 "It happened.  Brexit is approved. Voters in the U.K. decided yesterday, with a 52% majority, to leave the European Union.  Prime Minister David Cameron announced his resignation and the U.S stock exchanges were down 3% just after the open this morning.  European stocks were hit with a 10% drop in value.  Today will be an interesting day for anyone in the investment industry.  There is sure to be volatility and lost wealth in the short term, but this may present a buying opportunity for investors with cash on the sidelines.  There is a chance that this is the beginning of a market correction, so caution is still appropriate, but I will be re-investing some of the cash today that was pulled out in anticipation of this vote. Taking a long-term perspective, I think it’s important to note that many economists have suggested that this change may actually be a positive development for both the U.K. and the European Union once the dust settles and some time has passed.  Since most stock investors should have their eyes out to 2030 anyway, I think it’s safe to say that no one should panic.  The only constant is change."

Well, since the Brexit vote, we saw a quick dip in U.S. stocks and a very speedy recovery.  In fact, the S&P 500 is hitting new highs!  This type of event is rare, but it illustrates that investing is a mix of discipline, caution, and optimism.

Happy investing,



David Middleton - Tuesday, June 21, 2016

Normally, the stock market is bouncing up and down with a constant yet unpredictable rhythm and pace, called "volatility".  The sum total of all the information available to investors is taken in and investors respond accordingly based on their own beliefs, which changes market prices for stocks and drives the market either up or down.  Predicting when an event will occur that seriously disrupts the "normal" level of volatility is very difficult.  There are occasionally announcements made by the federal reserve or economic reports that we know about in advance, but often it's the unpredictable economic or political news that really moves the dial.  World events, disasters, scientific breakthroughs, wars, peace treaties, etc., are all rather hard to see coming.  Therefore, my preferred investment strategy is normally to hang in there and stick to the plan through the ups and downs.  

This week is different.  This week, we know the exact date that could mark a serious turning point for the global economy.  The U.K. is voting to either remain in the European Union or leave to regain their autonomy.  The U.K.'s exit from the E.U. has been dubbed Brexit (Britain+Exit).  Although the U.K. is subject to many rules set by the E.U., it seems that control over immigration policy is the driving force behind the movement to leave. 

The stock market, globally, has been very touchy with respect to this decision.  The U.K. is a critical hub for global financial markets and is home to perhaps the second most important city in the world for the financial system (London).   When early polls suggested that Brexit was more likely to occur than expected, the U.S. markets dropped.  When polls then showed that Bremain is still more likely, the markets moved upward.  Currently, it looks like the odds are very roughly 75% that the U.K. will remain with the E.U. and the markets should see a modest increase if that is the case.

This makes me very nervous.  An event that has such an impact on the market just with preliminary polls, taken from a small sample of voters, is likely to have a very significant impact when the real vote takes place, especially if the result is unexpected.  If Brexit occurs, it would surprise many investors with bad news and lead to a period of global uncertainty and caution that could be contagious.  Given that we've only seen one mild market correction since 2009, which occurred last year, this could be an event that triggers a 10%-15% drop.

I'm also wary because we've seen an example recently of an occurrence that was thought to be very unlikely by experts and pollsters alike: the republican nomination of Donald Trump for president.  What was the core issue pushed by his campaign? Also immigration.   Now, it's perhaps a stretch to equate the entire U.K. voting population with U.S. republican primary voters, but the core issue remains.  Early polls cannot be trusted with this issue.

Normally, I like to set an investment plan and stick with it, but I think this week it makes sense to do some mild adjustments in preparation for a possible surprise.  I'll be moving about 5-10% more into cash for most portfolios that don't already have a large cash position.  This won't prevent a loss in the event of a market correction, but it would soften the blow and setup an opportunity to buy low.  If the U.K. does vote to stay, the modest amount of missed gains would be a fair price to pay.

Happy Investing!


ETF's and Mutual Funds Explained

David Middleton - Thursday, February 11, 2016

In my investment advisory practice, the primary tools for implementing portfolio strategies are exchange traded funds and mutual funds.  These typically make up sixty to one hundred percent of a portfolio, depending on portfolio size, objective, and any legacy holdings that may need to be kept around for tax efficiency.  Portfolios larger than $2,000,000 may benefit from individual stocks, individual bonds, and occasionally direct real estate investments.   

“So, what exactly are exchange traded funds and mutual funds?” You might ask.  Well, also known as ETF’s, exchange traded funds can be described as a basket of individual securities which are bundled to allow for the convenient purchase and sale of them all together on a stock exchange, under one ticker symbol.  This allows for convenient and cost effective diversification in your portfolio by effectively holding hundreds of securities together and trading them as if they were one investment.  Mutual funds also bundle securities together for convenience and efficiency, but there are some important differences to understand between mutual funds and ETF’s. 

First, ETF’s trade on stock exchanges and can be bought or sold nearly instantly, whereas mutual fund transactions are ordered in advance and executed at the next market close.  The difference may seem trivial, but when rebalancing a portfolio or changing strategies, the mechanics matter.  For instance, if you needed to sell a mutual fund in order to purchase more shares of an ETF, or an individual security, you would need to wait for the mutual fund transaction to execute at the end of the day before you had the cash available to purchase the ETF when the market opened again (unless you had a margin account with your broker, which gets dicey).

Second, mutual funds are priced differently than ETF’s.  This point can be absolutely crucial if you are trading on a day with high volatility (like today, actually).  Here’s why: the total underlying value of all the securities within each share of a fund is called the fund’s net asset value, or NAV.  That NAV is calculated daily and is based on the price of each security within the fund at market close.  That’s why you need to wait for market close for your mutual fund transaction to execute- mutual funds always trade at the next calculated NAV.  In contrast, the price you get or pay for an ETF depends on the market value of the fund on the exchange at the time of the sale, which may be higher or lower than the NAV.  That’s right, if you sell below NAV, called a discount, it’s possible that you will get less for your shares than you would if you could sell each security within those shares individually (ignoring trading costs). Of course, you could also capitalize on the situation and purchase the same ETF at that discount, but that may not be appropriate for your investment strategy.  Bottom line, it’s important to understand whether you are likely to be trading at a discount or a premium when making ETF transactions. This can be rather hard to do, since quick market movements can change the NAV of a fund mid-day, but the NAV is only reported daily.  Also, when buying or selling ETF’s that are newer or fill a niche market, it’s possible that the market price reported on an exchange will be much different than the actual price you get for a trade, since there are fewer investors willing to trade the fund.  In these cases, it’s a good idea to use a limit order to execute the transaction and prevent nasty surprises.

If you are investing in a taxable account rather than an IRA, it’s important to understand that both mutual funds and ETF’s will make taxable distributions to shareholders based on transactions and dividends that occur within the funds.  Simply said, these distributions are taxed as either ordinary income, qualified dividends, short term capital gains, or long term capital gains, depending on their nature and your holding period of the fund. If you are extremely tax sensitive, ETF’s tend to be slightly more efficient by having fewer capital gains distributions, due to their structure.  

In recent years, the number of ETF’s and mutual funds available to investors has exploded.  This is great for professional investors like me that craft custom portfolios for clients based on their needs.  I can choose to focus on expense reduction, social responsibility, fundamentals, sector exposure, tax efficiency, or other factors, in any combination that fits a particular client.  

Happy investing!

Preparing for the Bear Market

David Middleton - Wednesday, July 01, 2015

The U.S. stock market has been on a phenomenal run since the recession, marking one of the longest "Bull Markets" ever. The Dow Jones Industrial Index is above 18,000 and U.S. companies are reaching incredible new levels of productivity. But how much longer will it last?

Well, this bull market, the period from March 2009 until today, is the third longest in history, which might suggest that the end could be near. However, the longest ever in history was relatively recent, from December 1987 to March 2000, when the Tech Bubble burst. That period is twice as long!

Many market indicators and analysts suggest that our economy is stable and capable of maintaining growth. This could be just the beginning of a period of exceptional world prosperity and growth, powered by many factors, such as:

  • Dramatically improved quality of life for people in emerging markets
  • Advances in technology and health care
  • Global connectivity and trade
  • The lowest levels of human violence ever in history, per capita

Of course, there are also many potential problems that could spell trouble for investors, such as:

  • Growing American wealth disparity.
  • Nuclear proliferation in the Middle East and Eastern Europe.
  • Increasing automation and unemployment.
  • Climate change and natural disasters.

So what's a prudent investor to do? Pick a side and gamble with market timing?


In reality, no one can be sure why or when the next market correction will occur, how severe it will be, or how long it will last. History has shown that market corrections are usually followed by times of above average returns, but of course that can't be guaranteed either.

The strategy that I recommend and implement for my clients forgoes any "crystal ball" predictions and focuses on each investor's personal situation to determine an appropriate diversified, global investment strategy. Everyone is unique in their goals, tolerance for risk, and level of wealth. Once you quantify your investment plan based on these factors and delegate the investment management to me, it becomes clear that a temporary drop in the stock market is not cause for concern, since your long term plan won't be derailed in almost every case.

To my clients: The market will eventually drop. Keep calm and carry on.

David Middleton

Welcome to the Blog!

David Middleton - Thursday, June 04, 2015

Hello clients and friends!

I'm excited to present the Middleton Advisory blog. My investment advisory practice has reached a point where I am comfortably serving a group of fantastic clients and I've setup processes and procedures to help my business run smoothly. These improvements, along with my successful attainment of the CERTIFIED FINANCIAL PLANNER(TM) designation in late 2014, should position me as a top provider of investment advisory and financial planning services.  I'm looking forward to sharing my thoughts and ideas on the blog and I hope you enjoy the content.

Happy investing!



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