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Why the Elanco IPO Announcement is Good for Everyone

Written by Ed Snyder, CFP° on .

 bulldog and cow - blog

Since taking over as CEO of Eli Lilly in January 2017, Dave Ricks has undertaken quite a few changes, the latest being the announcement that Lilly will spin-off it's Elanco division as a separate company through an IPO (initial public offering). Lilly considered three options for Elanco: holding it, selling it or the IPO.

Good for families, good for the community

The IPO is good news for Elanco employees and their families. It's good news for Greenfield, Indianapolis, Elanco and Eli Lilly. Companies answer to their shareholders, but Lilly has always been and continues to be, a great partner of the community. Lilly chose the IPO because it maximizes value for shareholders. But it's also great for the local community and Elanco employees and their families. A sale would have left employees worrying about keeping their jobs. It also could have meant a buyer may have moved the company from Greenfield. With the IPO, I would think, for the most part, those concerns are off the table.

Good for Lilly and Lilly shareholders

The pharmaceutical industry faces many challenges but also has many opportunities. The global population is increasing and aging at the same time, which will lead to more demand for medicines. Lilly expects to launch 11 new drugs by 2023*. They've said they intend to grow revenue through new products and volume and they are showing that they can do it. The spin-off of Elanco will allow Lilly to focus on the human pharmaceutical business and will provide cash that can be used for, among other things, potential acquisitions, as Lilly has said they plan to source one-third of their pipeline through collaboration or acquisition*.

So far, just the announcement of the IPO has benefited owners of Lilly stock. July 23rd, the day before the IPO announcement, the stock closed at $88.88. The IPO was announced July 24th and the stock closed at $93.34 a share. As I write this on August 10, the stock is at $102.82. It hasn't been in this territory since 2000.

Good for Elanco

Elanco will go from being a small part of a large pharmaceutical company to becoming a separate and distinct company that will be able to establish its own priorities. The animal-health market overall is growing, as pet ownership is rising, pets are living longer and there is growing demand for meat and dairy products as the world's population grows. And Elanco is a global leader in this growing industry, ranking 4th by revenue among animal health companies in 2017. Their sale by Eli Lilly will give them independence to focus more clearly on their business and facilitate their future growth.

We're here if you have questions.


This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met.

Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.

How to Invest My Lilly 401(k)

Written by Ed Snyder, CFP° on .

woman at computer for website

The income that you live off of during retirement will come from three sources; your Lilly pension, Social Security, and the money that you saved in things like your Lilly 401(k), IRAs and other investments. For most people, the 401(k) will be their largest asset to meet their retirement income needs, so it's important to take good care of it.

The Lilly Employee 401(k) Plan offers seven investment options, nine Target Date Portfolios, the Eli Lilly Common Stock option and the self-directed brokerage account.

In the Target Date Portfolios, each contains a mix of stocks, bonds and money markets invested with an eye toward the year you expect to retire and start withdrawing money. As time goes by, the investment mix shifts to more conservative investments (bonds and money market) automatically.

Target Date Portfolios are kind of a one-size fits most approach to investing. They offer very general diversification based on the date chosen. These options are typically used when the employee doesn't have the time or knowledge to properly choose other investments. They become the fallback option. You would probably prefer an investment mix that perfectly matches you. That includes a plan that accounts for your age, risk tolerance, and goals.

As for the other seven investment options (not including Lilly stock), they offer a limited ability to truly diversify your investments. Although you can achieve a fair amount of diversification with the core options, they do not provide the most flexibility and customization. For example, the International Equity options include investments in emerging markets as well as developed markets. What if you want your international investments to be in developed markets but not emerging? You don't have a choice. It's all or none. The same can be said for the Fixed Income option. It invests in high yield bonds and emerging market bonds. And the Real Assets option invests in precious metals, commodities, and real estate. While exposure to these areas may not be bad, if you would prefer to not be invested in emerging market bonds or maybe you want to be invested in real estate but not precious metals or commodities, you don't have a choice. If you want real estate exposure in your 401(k) you also have to be invested in precious metals and commodities because the fund owns all of them. You have no way to segment them out.

Utilizing the self-directed brokerage account will allow more flexibility and customization. This is a brokerage account within the 401(k) in which you can choose from thousands of investments, many of them with no commissions or transaction fees. With this increased choice of investments, you are able to tailor your 401(k) to your needs.

You may be saying, "I don't know what options to use out of the eight core options. How in the world am I going to be able to choose from thousands of options?" I agree. With any options you choose, you should either be very comfortable choosing investments on your own or seek the advice of a professional who can help you determine your risk tolerance and goals. According to a recent survey by The Charles Schwab Corp., 45% of respondents don't feel they know what their best 401(k) investment options are. When asked how confident they would be in making the right investment decisions if they had the help of a financial professional, 76% said they would be either extremely or very confident. Without advice, only 50% expressed confidence.

You work hard for the money you're saving in your 401(k). Make sure it's working as hard as it can by fine-tuning your 401(k).

We're here if you have questions.

What to do if Your Pension is Frozen or Terminated

Written by Ed Snyder, CFP° on .

terminator - for blog

Steel monster- Terminator. Photo by Rostislav Kralik

In 2017, only 16% of the Fortune 500 companies offered a traditional pension plan to employees, compared to 59% in 1998*. While the use of pension plans is on the decline, among pharmaceutical companies those numbers are much better, with 50% of companies still offering pension plans.

The shift away from pension plans is obvious and ongoing. As more and more companies get rid of their pensions, it makes it easier for other companies to also dump theirs. It used to be that a company needed to offer a pension to employees to be competitive with other employers. That's not true anymore.

Companies eliminate pension benefits to employees in two ways: freezing or terminating. Let's take a look:

Freezing: When a pension plan is frozen it is closed to new employees and current employees may stop accruing benefits, but the plan continues to operate. You generally have to wait until retirement age to begin receiving benefits – either a lump sum or a monthly annuity amount.

Termination: When a pension plan terminates, it stops operating. Employees participating in a pension when it is terminated are generally offered a monthly annuity payment during retirement or a lump sum payment to be made at the time of the termination of the plan. In either case, participants will still receive a benefit and will not lose anything they've already earned to that point. They just won't earn more benefits in the future.

So, what should you do if your employer freezes or terminates its pension plan?

How Investing is Like the Indy 500

Written by Ed Snyder, CFP° on .

indy 500 -blog- robert rescot

Photo credit: Robert Rescot

The Greatest Spectacle in Racing, the Indianapolis 500, returns to the Indianapolis Motor Speedway (IMS) this weekend for its 102nd running. I'm a big fan of the race, the history of the race and the track itself. Just as I'm a student of the history of the track, I'm also a student of investing. The 500 and investing have a lot in common.

Many successful long-term investors don't get too excited when things are going well, and they don't get down when things are going poorly. Instead, they stick to long-term plans that are built around their financial goals. The best way to reach those long-term goals is to remain disciplined and patient – whether you are experiencing joy over the markets good returns or grief from periods when things aren't so great.

Study after study has shown the importance of staying disciplined. Case in point: A recent report by research firm Dalbar, Inc. The study found that between December 31, 1997, and December 31, 2017, the stocks in the S&P 500 index returned an average of 7.20% annually.* Yet the average stock investor only gained 5.29% on average over the same period. One major reason for this sort of performance gap is that most investors just don't stick to a plan. Instead of remaining disciplined and patient, they let their emotions rule and try to "time" the market - jumping in and out as stocks rise and fall. The result is usually very predictable.

The Parallels Between the Indianapolis 500 and Investing

Last year Takuma Sato won the 500 with an average speed of 155.395 mph. Sato also had the fastest race lap at 226.190 mph. When you look at just the 155.395 mph as Takuma Sato's average speed, it doesn't give you any indication that these cars are turning laps at 220 mph plus. So, if the cars can go 220 mph, why can they not average more than 155.395 mph during a 500-mile race?

Many laps of the race have high average speeds but then a yellow flag can come out because of an accident and the cars slow down behind the pace car. Consider that the average speed for caution laps is 75-80 mph, significantly slower than racing speeds. There were 11 cautions during the race for a total of 50 laps. Many times, during a caution, drivers will go into the pits to change tires and refuel. The speed limit on pit lane is 60 mph so pit stops also greatly reduce their average speed.

Investments perform in similar fashion. Looking at the chart below you'll see that the return of the U.S. stock market from 1926 through 2017 has averaged 10.27% per year. This is like Takuma Sato's average race speed of 155.395 mph. Over those 92 years, the market had an annual return within two percentage points of the average of 10.27% in only 6 years. That's like saying that Sato turned lap speeds near 155 mph only 13 out of 200 laps. Some years the market did really well, like 2009 when it was up 26.26%. And some laps Indy cars go really fast, like Sato's fastest lap of 226.190. Other times the market is way down, like in 2008 when it was down 37%. Similarly, race speeds are way down on yellow laps and especially when the cars are on pit lane, with its 60 mph speed limit. Did you know that the stock market has had a 10% or more decline about once per year, on average, since 1948? So, just like yellow flags or pits stops, market pullbacks are common occurrences.


Focus on the Finish Line

The point is, whether it's the Indy 500 or investments, in achieving your average speed or average return, you will likely not experience speeds lap by lap near the average speed for the race. Just as you will likely not experience returns on your investments year by year near the average returns that you will experience over the long term. Some laps (years) will have much greater speeds (returns) while others will have much slower speeds (lower returns). Drivers in the Indianapolis 500 need patience and discipline to make it through the long 200 laps and 500 miles. They realize the race isn't won on the first lap. They also realize that an ill-timed pit stop or yellow flag, during which they are only going 60 to 80 mph, does not destroy their progress in moving towards their ultimate goal of the finish line. They remain focused and do not get rattled. Investors also need patience and discipline to make it to their long-term goals. You must realize that investing is not a race, it is a long-term journey and it certainly is not won or lost on the first lap or in any one year. Pit stops and caution flags happen in racing. We expect them. They are just part of the sport and although we expect them and we know they will happen, we don't know when. Yet, even with these slow-downs, drivers and cars go on to achieve tremendous average speeds. These slow-downs also occur during your investing lives on your way to your goals. Just like in racing, we expect them to occur. We know it's going to happen, but we don't know when. It doesn't mean that we give up. It's part of investing. Remain disciplined and patient and focus on your long-term goals. You've got to stay in the race, even during the yellow flags and pit stops, to be in it at the finish line.

Footnotes: The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The MSCI EAFE Index is an equity index which captures large and mid cap representation across Developed Markets countries around the world, excluding the US and Canada. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results


Here's the Good News About the Stock Market Being Down

Written by Ed Snyder, CFP® on .

on sale website

The stock market was down about 2% yesterday and, believe it or not there was a headline – "The Stock Market is Having its Worst Second Quarter Since the Great Depression". The quarter literally started yesterday. This is the type of negative and doom and gloom type stuff you're going to see. It's no wonder that people get nervous about things.


stockmarket small

Put these market slumps in perspective. It's normal and it's expected. It's the price that we pay, as investors in the stock market, for returns that have historically been better than returns that we can get anywhere else. It's just the price of admission if you will. It shouldn't be a surprise that the market goes down. I saw a great Tweet today by Morgan Housel - "About once a year people forget that the market falls 10% about once a year." So true.  

In fact, look at it another way – today is April 3rd. Depending on when you get paid, whether you get paid twice a month, once a month – if you get paid the 15th and 31st or 15th and 1st, your 401(k) contribution probably went in within the last couple days. You're buying shares in your 401(k) that are about 10% cheaper than they were back at the end of January.

So what does that mean in dollars and cents? If you bought a share for $10 a share back then, today it's on sale for $9 a share. That means if you put in $100 back at the end of January, you would have received 10 shares of that investment for $10 a share. Today when that money goes in you're receiving 11 and some fractional shares. So you're receiving at least one extra share for the same amount of money.

It's on sale. Normally, we enjoy sales. For some reason, in the stock market, we get upset about it.

Don't get deterred by the headlines. As we know, these downturns are temporary and they're necessary. We just need to exercise patience and discipline and keep our eye on the long term.