Pitfalls of Buffered and Levered ETFs to Achieve Your Financial Goals

Pitfalls of Buffered and Levered ETFs to Achieve Your Financial Goals

 

The marketplace for exchange-traded funds (ETFs) grows each day, and more and more different and innovative products are being created. One new type utilizes derivatives. A derivative is a financial object that derives its value from an underlying financial security. An example of this is what is called an option. An option is a contract between two parties that gives the buyer the choice to buy or sell a security at a predetermined fixed price. The original purpose for options was to balance risk in a concentrated portfolio. You could hedge a bet by securing a selling price or buying price of a stock. Nowadays, some ETFs are using derivatives for very different purposes, such as increasing their exposure (levered ETFs) or setting a buffer on the equity returns (defined-outcome ETFs). While these ETFs are innovative and flashy, it’s important to think about the ramifications of investing in such a product.

A levered ETF uses either derivatives or borrowed capital to increase exposure to the underlying assets (e.g., stocks). This increase is a double-edged sword. Not only are the ups larger but the downs are larger as well. In a portfolio, the increase in the drawdowns makes the leverage ineffective for increasing risk-adjusted returns, unless paired with volatility or drawdown-reducing strategies such as trend following. In March of 2020, the S&P 500 Index fell by -12.5%. For a theoretical 2x levered portfolio, the drawdown would have been -25%. An unlevered portfolio would need a return
of 14.3% to get back to breakeven. A 2x levered portfolio would need a return of 33.3% to get back to breakeven. Astute readers will notice that 33.3% is MORE than double 14.3%. This simple aspect of leverage is one of the many reasons it should be taken on with caution. Successful investing is often more about not losing than it is about winning.

These ETFs offer certain upsides and downsides. These upsides and downsides are calculated for the lifetime of these funds. Depending on when the investor buys into the fund, they could experience a very different return, including one outside of the promised range. This limitation can particularly be a problem if the market increased prior to the purchase, as the upside return at that point can be severely capped. The forward-looking return of these products decreases exponentially as the market increases.

Levered ETFs also suffer from underperformance compared to their benchmark. This drag comes from the imperfect way that leverage is acquired either through derivatives or borrowed capital. Out of 22 standard levered ETFs in the market today, every single one of them has underperformed their prospectus benchmark when the same amount of leverage was provided for the past five years. We believe this underperformance, when combined with the issue of large drawdowns, high tax costs due to inefficiency of derivatives, and high fees, makes these levered ETFs ill-advised as long-term investments.

Another new instrument that has captured the attention of many is the so-called “buffer ETF.” Buffer ETFs advertise guaranteed returns in a specific range. While these products offer a solution to specific problems, like the levered ETFs, we believe they are an ill-advised investment for long-term investors looking to grow their principal or provide income in retirement.

The biggest drawback of buffered ETFs is that investors pay too much for the downside protection that they receive.

The most widely held products advertise options for reducing annual downside risk by 9%, 15%, or 30%. In return, the investor relinquishes upside growth.

The plot below shows how the annual return distribution of a buffered approach compares to the return of the underlying index. The index is represented by the historical annual returns of the S&P 500 minus 0.05% which is an estimated cost for a low cost S&P 500 index fund. The buffered approach simulates applying a 9% reduction in downside risk and capping the upside at 15%. It is intended to be representative of the types of products currently on the market. It also includes a 0.75% reduction to simulate the fees associated with typical defined-outcome products.

 

 

The plot shows clearly that while the buffering provides some downside protection in large drawdown years, there have been very few of those historically. Let’s see how this affects an investor’s outcome in some real-life scenarios.

For the years 2017, 2018, and 2019, the S&P 500 has returned 22%, -4%, and 32%. A 13% buffer ETF would have reduced the cumulative 53% gain to an approximate 25% gain. When we apply this same methodology of a 15% top buffer and a -9% bottom buffer to the S&P 500 since 1928 (94 years) on an annual basis, we get a stark difference in returns. During the 94 years surveyed, the S&P 500 index minus an average index fund expense ratio (“Net S&P 500 Index”- see important disclosures regarding these calculations below) had an annualized return of 10.2%, while a the model for a rolling buffer ETF on the S&P 500 Index starting January 1st would have a return of 6.1%. To further illustrate this point, for example, start with $100,000 and invest it for 25 years, and at these annualized rates of return an investor may see the Net S&P 500 Index outperform the rolling buffer ETF model by $600,000. This underperformance can seriously affect the probability of successfully reaching one’s goals.

While an investor is buying drawdown protection by using a buffer ETF on a 5-year timescale since 1928 this has only yielded better returns 18% of the time as compared to utilizing alternative vehicles in seeking to protect against downside risk. Historically, a more efficient and higher return way of decreasing downside risk is using fixed income solutions such as treasury bonds. By way of an example utilizing the historical data described above, if an investor used 20% of the portfolio allocated to 5-year treasury bonds and the rest to the S&P 500 index model referenced above, the investor has reduced the historical possibility of underperformance to 13% and will maintain, pursuant to the historical data, a return that’s over 3% of the buffer ETF model. When done with multiple types of fixed income and alternative asset classes such as reinsurance or alternative lending the probability of underperformance continues to decrease. Do take note that the return and underperformance possibilities are based upon historical performance data and, therefore, future performance is in no way guaranteed and may be subject to wide variances due to unforeseen market, economic and other conditions. Peace of mind is something we all seek. In many cases, purchasing insurance to guard against risks one can’t control is an excellent choice. However, if the premium you pay is greater than the insurance you receive, it doesn’t make financial sense.

The bottom line for most of these derivative investments is that while they seem very attractive on the surface, once you look at the mechanics and nuances, they turn out to be ineffective at generating the solid risk-adjusted returns most investors need and want to meet their financial goals.

 

 

IMPORTANT DISCLOSURE AND DATA INFORMATION

The distribution graph is for illustrative purposes only, and is not intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. The information portrayed in these materials represents model performance and characteristics for the Merriman Model S&P 500 Index Fund or the Buffered S&P 500 and may not reflect the impact that material economic and market factors may have had on the adviser’s decision making. The make-up of any actual advisory program portfolio may differ as compared to the model portfolio provided herein, and is not meant to be representative of any one client or portfolio. In addition, the actual results of any of the adviser’s client portfolios may have been, or may be, materially different than the results of the hypothetical portfolio set forth herein. Market conditions, client restrictions, world events and any other macro variables may have a substantial impact on any of the adviser’s advisory program portfolios. The performance information does include the deduction of advisory fees and execution related fees, except custodial fees. To determine the Net S&P 500 Index, the average expense ratio used was determined by taking three of the largest and most liquid S&P 500 Index ETFs and averaging their fee. (IVV @ 0.04%, VOO @ 0.03%, and SPY @ 0.0945%) This averaged to 0.058% and then rounded down to 0.05% for ease of use and due to industry wide fee compression. The performance information does reflect the reinvestment of dividends and earnings. The information used for S&P 500 columns is based on historical index returns from 1928-2019. The information used for the “buffered” column is based on simulated data as described in the article. All data calculations are available upon request.

The information provided should not be considered a recommendation to purchase or sell any industry, sector or particular security. There is no assurance that any industry, sector or security discussed herein will remain in a client’s account at the time of reading this material or that any industry, sectors or securities sold have not been repurchased. The industries, sectors or securities discussed herein do not represent a client’s entire account and in the aggregate may only represent a small percentage of an account’s holdings. It should not be assumed that any of the securities, transactions or holdings discussed were, or will prove to be profitable, or that investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. All investing entails the risk of loss.

The S&P 500 index includes 500 leading companies in the US and is widely regarded as the best single gauge of large-cap US equities. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. The holdings and performance of Merriman client accounts may vary widely from those of the presented indices. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman Wealth Management unless a client service agreement is in place.

What is The Best Strategy for My Investments During These Unpredictable Times?

What is The Best Strategy for My Investments During These Unpredictable Times?

 

In the weeks following news of the corona virus outbreak, the S&P 500 lost over one third (34%) of its value (between February 19th and March 23rd).

Unemployment figures so far have fallen to 6.7% for the month of November, down from 11.1%  in June, yet the S&P 500 has rallied 61.87% from the March 23rd low (through November 30th).

Markets and the economy seem to have decoupled—should we be worried? Have we seen this before? Let’s look at past major market declines to see how markets and economic measures have acted in the past.

In the 1973–74 market crash, the S&P 500 bottomed on October 3rd, 1974, and started to rally forward while unemployment continued to increase until May 1st, 1975, seven months later.

In the aftermath of the tech bubble bursting in the early 2000s, the S&P 500 bottomed on October 9th, 2002, after dropping 49%; and it began a swift rise while unemployment rates also continued to increase for nine months until June 2003.

In the aftermath of the financial crisis just over a decade ago, the S&P 500 bottomed on March 9th, 2009, after losing over 56% of its value. The markets began a lasting bull market while the news and data grew worse. Unemployment continued to increase through October 2009 (eight months later), GDP continued to decline through June 2009, and bankruptcies of banks continued at record rate throughout 2009 and into 2010. Again, the stock market seemed to have “decoupled” from economic data.

The stock market is considered a “leading economic indicator.” The news and measurements of the economy determine what has happened while the market looks forward to what may be coming.

There is precedence for what is happening with markets rebounding before we see the elusive “light at the end of the tunnel.” History shows that markets have typically rebounded ahead of economic measurements.

So, what is next?

The events that have unfolded in 2020 emphasize how unpredictable the future is and will continue to be. While many knew that the possibility of a global pandemic existed, we had no idea when it would strike, causing the 34% drop in February and March while fear took control of the markets. Further, economic measurements did not signal when markets would begin a recovery. Once again, there was no “light at the end of the tunnel” to signal the 62% market surge from March 23rd through November 30th.

We may not yet be through the worst of this pandemic. Markets may drop again, possibly even further than they did in March. Perhaps the roll out of the vaccine will change things more quickly than previously expected. Maybe the market will continue to grow from here.

The future is fundamentally unpredictable, and the world is always changing; yet the very real effects of fear and greed that each of these cycles elicits is predictable and consistent. We know that fear and greed create chemical reactions in our brains that lead to poor decision making. We need a disciplined framework to lean on to keep from making decisions we later regret.

The best strategy for capturing the highest risk-adjusted returns remains keeping your money invested in a massively diversified portfolio, rebalancing when your allocation deviates from its target. This will have you take advantage of market swings.

At Merriman, our rebalancing sensitivities were triggered in March and April for many portfolios. This generally had us buying stock funds after the big decline with proceeds we pulled from bond funds after they had rallied in response to the fear of current events. Going further back, rebalancing had us trimming from stock funds throughout the more than decade-long bull market that started with the recovery from the financial crisis of 2008 to add to our bond funds, preventing greed from taking those profits back.

Rebalancing has us buying asset classes at low prices when fear can make it difficult, then selling asset classes after they have grown to higher prices when greed can have us wanting more.

Rebalancing is a disciplined framework that helps us with the number one goal of investing: Buy Low, Sell High.

Feel free to reach out to us if you’d like to discuss how to apply rebalancing to your specific situation!

 

Important Disclosure:
Past performance is not indicative of future results. No investor should assume that future performance of the S&P 500 will be similar or equal to previous years/periods.   The S&P 500 is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S stock market.  S&P 500 performance data was obtained from Yahoo Finance. 

My Journey to Sustainable Investing | An Advisor’s Perspective

My Journey to Sustainable Investing | An Advisor’s Perspective

 

During my senior year in high school, I was invited to go backpacking in Yosemite with the Yosemite Institute. I had been backpacking many times before with my father all over California. We even climbed the tallest mountain in the continental United States (Mount Whitney) when I was 14. I loved the adventure and challenge of backpacking. In those early years, I didn’t realize the importance of being in nature. It wasn’t until the Yosemite trip that our guides taught us about the history of the national parks in the delicate balance between the visitors and the surroundings. They also taught us the importance of taking care of our planet. When my classmates and I stopped in a McDonald’s on the way home from Yosemite, I remember taking the Big Mac out of the Styrofoam container and asking them to reuse it. Back in the 80s, I don’t think climate change was on many people’s radars. Today, the science of climate change makes me want to do everything possible to care for the planet for the generations to come. I’ve always done my part but drew the line when it came to investing sustainably. My thought has always been to maximize returns in my investment portfolio and give charitably to causes that fight climate change.

I just didn’t believe that I’d be able to diversify enough (too risky). I believed that returns would be lower in part due to higher expenses. I also got confused about the differences between being socially responsible and sustainable investing. There are also a lot of acronyms and terminology to understand, such as SRI (Socially Responsible Investing) and ESG (environmental, social, and governance).

The history of Socially Responsible Investing (SRI) goes back as early as Moses in 1500 BC. In more modern times, the 1950s saw the first mutual fund, the Boston-based Pioneer Fund, to avoid “sin” stocks: companies that dealt in alcohol, tobacco, or gambling.

While I don’t love to support alcohol, tobacco, and gambling, my values aim to focus on investments that help the planet. My values seek to focus on the “E” in ESG: the environment. Doing well while doing good.

Sustainability investing is a choice and investors decide whether aligning their investment decisions with their environmental values is right for them.  At Merriman, we believe that, all else being equal, a sustainability investing strategy should generally reward companies for acting in more environmentally responsible ways than their industry counterparts. This belief is in contrast to many other sustainability investing approaches that exclude entire industries regarded as the worst offenders.  Sustainability strategies place greater emphasis on companies considered to be acting in more environmentally responsible ways while also emphasizing higher expected return securities. This approach enables investors to pursue their environmental goals within a highly diversified and efficient investment strategy.

It feels like we have both been on the same journey to the top of the mountain to build a portfolio that focuses on the environment without sacrificing risk-adjusted returns. Merriman recently announced major changes to our values-based portfolio, and I have moved all of my investments into our new portfolio. When I combine a sustainable portfolio with charitable giving, it is one small way to do my part in “leaving no trace behind.” If you would like to learn even more about our approach, you can read “Incorporating Environment and Social Values into Your Merriman Portfolio”.

 

 

 

Why You Should Consider ROTH Conversions During a Bear Market

Why You Should Consider ROTH Conversions During a Bear Market

 

 

We expect most people have a grasp on how to make money in a bull market, but it can be far more challenging to contemplate how to make money during a bear market, when emotions are running high.  It’s not all about making money, though.  Some of it involves figuring out how to put oneself into a better financial position for the future so that you can heal faster from the losses.  There are a handful of key strategies to engage in during a bear market that will help your finances as much as your future, and one of the most important of these is ROTH conversions.

Believe it or not, bear markets represent the best environment into which to make an IRA-to-ROTH conversion.  The more negative the equity losses are, the more attractive the conversion becomes.  When making a conversion to ROTH, you can either move cash or you can move shares of the stocks or mutual funds that you own in the IRA.  When we make a conversion, we choose to move shares for our client families.  The tactical benefit here is that we actually get to pick the specific funds to move from the IRA to the ROTH.  Whichever funds have the deepest losses for the given year are the ones with the highest priority to move over first.

Think of it this way: if we found ourselves in a sharp bear market, we would expect several equity asset classes to be down, but maybe inside our IRA the US small cap fund went down the most with a -35% loss.  Although it may not feel like it, bear market losses are temporary, so it is important to take action and make the conversion to the ROTH while the markets and the news are negative and remain temporarily distressed.  If we were to hypothetically move $50,000 of the US small cap fund in our example, we would actually be moving shares that were previously 35% higher in value at $77,000.  If we convert the $50,000 of small cap shares right now, we incur the tax liability on those shares on the day they are moved over.  Once the shares have arrived in the ROTH, it then becomes a matter of exercising patience.  It might take six or nine months for the current bear market to pass; but when the economy improves, those distressed shares should bounce back in value.  In a relatively short number of months, the $50,000 that was converted and that you paid tax on might be worth $65,000 or $70,000—but remember, you only paid tax on $50,000.  Much like a spring being compressed and then subsequently released, the idea behind the conversion is to move the shares to the ROTH while the spring is compressed.  Simply put, the bear market represents a tax-savings opportunity in disguise, so acting now is highly important BEFORE things improve in society.  Effectively, ROTH conversions and bear markets coupled together give us a way to legally cheat the IRS out of tax dollars.

The benefits of ROTH conversions are not just effective during a severe bear market but can be utilized nearly every year.  If you employ a highly diversified portfolio with multiple asset classes held in your IRA and ROTH, there are lots of opportunities to take advantage of the up and down stock market movements, as many asset classes move at different rhythms.  There are a host of financial planning advantages to ROTH accounts and gradually converting IRA money into ROTH each year.  Keep in mind, ROTH accounts contain post-tax money; they do not have required minimum distributions, which do apply to traditional IRAs; and all of the future growth on the assets in the ROTH are considered post-tax.  All withdrawals from ROTHs are voluntary, and all of the dividends, interest, and earnings in the ROTH are shielded from taxes.  Another advantage of a ROTH account is that it can be viewed with your IRA using an overall investment approach that we call Asset Location.  Essentially, Asset Location seeks to view the IRA and ROTH accounts as if they were one account holding one investment portfolio but divvies the funds between the accounts to the greatest advantage.  Reach out to your advisor if you are curious about conversions and ROTH accounts and learn more about how we advocate for our families.

With the World Working from Home, How Can Real Estate Be a Good Investment?

With the World Working from Home, How Can Real Estate Be a Good Investment?

 

One of the most noted and real impacts of the coronavirus is that employees are working from home. While it has been a huge shift, four plus months in, the results have been positive for many, and headlines in business publications are examining whether a substantial fraction of these employees may never return to the office. There is solid debate about how big the impact will ultimately be, but there is no doubt that companies will be revisiting their spaces.

This trend might lead one to worry that real estate values will plummet as demand falls and supply stays constant. To this I would offer two counter points. First and foremost, commercial real estate encompasses a wide range of investments. The pie chart below shows the sub-sector breakdown of the holdings of our most widely recommended real estate investment, the Dimensional Global Real Estate Fund (DFGEX).

REITs that focus on office properties as of June 30th, 2020, made up just 12% of the fund’s allocation. Office REITs do not just own high-rise commercial office buildings in downtown cores. Much of the space they own is in suburban office parks and includes space leased by dentists, hairstylists, lawyers, and small research and engineering firms. While many more things can be done virtually, there are still many businesses, such as orthodontists and spas, that will always require an in-person experience.

While demand for some types of office space may be dropping, demand for other types of real estate in the fund is growing. As of June 30th, the top three holdings in the Dimensional fund were American Tower Corporation, Crown Castle International Corporation, and Prologis Inc. American Tower and Crown Castle are owners and providers of infrastructure for wireless communication and fall into the Specialized category. Prologis is in the logistics real estate business, leasing distribution facilities to support direct fulfillment to customers. All three of the companies are poised to see substantial growth from increasing demand. The fund owns many other businesses, from cold storage warehouses to multi-family apartments to medical facilities, where demand remains high.

The second point is that changes always follow any societal upheaval. There is no doubt that COVID will have an impact on our world. However, it is unclear that the shifts will be as radical as some are predicting or that COVID alone will cause the demise of industries or institutions. Large scale change rarely happens that quickly or dramatically.

For example, the idea that demand for office real estate will suddenly drop 60–70% seems overblown. IBM was an early proponent of telecommuting. In a 2009 report, they boasted that “40 percent of IBM’s some 386,000 employees in 173 countries have no office at all.” According to an Atlantic article from 2017, they unloaded 58 million square feet of office space at a gain of nearly $2 billion. By all accounts, it sounded like a winning strategy. Only, it did not work out, and in March of 2017, IBM decided to move thousands of its workers back to physical company offices.

The problem was likely a drop in what the Atlantic terms “collaborative efficiency”—or the speed at which a group successfully solves a problem. Physical distance still mattered when it came to team creativity, and remaining competitive in a rapidly changing landscape more and more requires novel solutions to complex problems. Offices may look different, but I believe that more than ever people and employees will need places to gather and connect.

The future trajectory is never clear even to the greatest minds. What is clear is that people will always need spaces to live, work, and conduct business. What those spaces look like will evolve, but companies are motivated to adapt. And historically, they have changed industrial warehouses and former malls into Amazon fulfillment centers and multi-family apartment complexes. Despite the recent drawdowns and changing landscape, we believe that investing in a diversified real estate portfolio continues to offer the potential for equity-like returns, current income, and solid inflation protection, all important elements of a well-balanced portfolio.

 

Getting Creative with Financial Literacy

Getting Creative with Financial Literacy

As a dad and a financial advisor, I find myself constantly trying to explain how money works. In my opinion; budgeting, investing, and creating income are topics that should be equally important to my 8-year-old daughter as they are to a 50-year-old client. Unfortunately, for whatever reason, access to financial literacy tools for money management are not a mainstream part of our educational system. With more and more resources available at our fingertips, it is my hope that the next generation will grow up already knowing how to save and plan for retirement way before they get their first job.

Take my daughter for example. Last summer, my then 7-year-old asked me what I do for work (I’m a financial planner). It turns out, her friends were all talking about what their parents did for a living, so naturally my daughter wanted to join in on the conversation. Up until this point I had always told her that I helped people get ready for retirement, which I summed up as a “summer vacation that never ends”. She didn’t give it much thought until other kids started talking about how their parents owned a restaurant, helped people get better as a doctor, or worked on getting packages delivered faster as an engineer at Amazon. When my daughter told her friends that her dad helped people get ready for a never-ending summer break, she got a lot of “Huh?” faces.

I then decided to have a more in-depth dialogue with my daughter around what I actually did. The basics of how investing works seemed like a good place to start. So, using the tools we had at our disposal (crayons, blank paper and a 7-year-old’s imagination) I set out to explain what a financial advisor does. It started with a simplistic explanation of what the stock market is, and by the end of our first conversation, my daughter had learned the rhyme: “Stocks make you an owner, and bonds make you a loaner.”

This was progress! After a few more arts-and-crafts sessions, we had created a story explaining how investing in the stock market works, and it was starting to resemble a book. At this moment, I told my daughter we should try to publish our book so other children could learn about investing, and she turned to me and said, “Dad, you can’t just publish a book. Only authors can do that!”  Challenge accepted!

Fast-forward six months, and our rough draft was polished into a finished book. Today, you can find “Eddie and Hoppers Explain Investing in the Sock Market” on Amazon! As a dad and a co-author, I’m very proud of my daughter for helping me create this story and for helping me make the book a reality.

After the book came out, I figured my daughter would stay interested in financial literacy, but I should have known asset allocation and risk management weren’t exactly the most exciting topics for an 8-year-old. I had to find a way to introduce financial topics into everyday life.

Money management for a second-grader is pretty simple. My daughter’s main income sources are: A monthly allowance, gifts from relatives for birthdays/holidays, plus she had a lemonade stand last summer that netted a respectable profit. The problem wasn’t earning the money, the problem was keeping track of it and then remembering how much she had when she wanted to buy something.

So, as a dad/financial advisor, I did what comes natural… I created a spreadsheet to track everything. Turns out, spreadsheets are also pretty low on the list of things that my daughter finds interesting. This is when I had my a-ha moment. I did a quick internet search and found a lot of options for tracking how much a kid earns, spends and saves. Last summer when I was trying to teach my daughter what I did for a living, I did a similar search for children’s books that discuss financial topics and found very little. That’s what inspired me to write our book. Thankfully, this time I was able to find what I was looking for when searching for an app that could help me teach my daughter about budgeting.

Ultimately, I decided to use Guardian Savings with my daughter because it has the right balance of simplicity and effectiveness. Guardian Savings allows my wife and I to be ‘The Bank of Mom and Dad’. My daughter finally got organized, and she consolidated all her savings from the half-dozen wallets, piggy banks and secret hiding spots, so she could make her first deposit. More importantly, when we’re at the store or shopping online and my daughter finds something that she must have, we’re able to open the app and let her see the impact of making an impulsive purchase. Plus, as the parent, I get to decide what interest rate my daughter will earn in her account. Not only do I get to have a conversation about what interest is, but she gets to experience the power of compound interest by seeing her savings grow each month. Talk about a powerful motivational tool!

In this day and age, the idea of teaching your child how to balance a checkbook is outdated. The next generation will live in an entirely digital world. Apps are the new checkbook, and it may be a good idea to teach your children personal finance in the same environment they will be in as adults. Already a digital native, my daughter impressed me by how fast she learned how to use the app, not to mention the principals of saving and smart spending that are encouraged throughout the interface. In a few years, I’ll be able to discuss what asset allocation is and how a Roth IRA works, but for now I’m happy that my daughter can get practice making budgeting decisions and building a strong understanding of the basics.  Financial literacy has to start somewhere and the sooner that foundation can be made, the more confident a child will be when it comes to managing money as an adult.