Stock Market Thoughts

As I reflect on the past week, these are major themes:

  • Sudden declines usually do not come with a clear warning.  However, declines of 10-15% within a year are actually very normal.  A year may include a significant decline at some point, even though a year may actually turn out positive.  Not fun, but normal.
  • View and perspective are key.  You should not just focus on what occurred over the past 10 days.  What was your portfolio worth in 2010?  2012?  Since January 1, 2013?  Those should be very different than the losses of this August.
  • Market timing is impossible.  If it was, then Warren Buffett would not have made his largest ever corporate purchase, of over $36 Billion, on August 10th, one week ahead of a major market decline.
    • If he anticipated this downturn, he would have either waited to make this purchase at a lower price or he would not have bought this company, and purchased other stocks during the past 10 days.
  • Your portfolio, if managed by our firm, has a solid foundation of fixed income (cash, bonds, or CDs), especially if you are in retirement or in the withdrawal phase of your life.
    • For example, if you have a $3 million portfolio, and 50% is in fixed income, you would have $1.5 million in stocks and $1.5 million in fixed income, which is not subject to stock market volatility.
    • If you are withdrawing 4% of your portfolio, or $120,000 per year, then you would be able to withdraw $120,000 a year for the next 12-15 years, without having to touch the stock investments.
    • With this type of plan, you have a strong foundation.  The short-term stock market ups and downs would not impact the quality of your life.  Over the long run, you should be rewarded by the expected returns of the stock market.

In June, 2011, I wrote the following blog post: Five Years: Financial Thoughts. (The thoughts would be valuable in 2006, 2011 and 2016.) Of the 204 blog posts I have written since 2009, this is one of my favorites.

Prompt:  What would you say to the person you were 5 years ago?  What will you say to the person you’ll be in five years?  (This was a blog post prompt from Seth Godin).

Do you see the pattern that follows?

5 years ago, June 2006: What advice would I give now, to myself, for 2006?

Provide financial advice to your clients that is always in their best interest.

Be sure that your clients have well diversified portfolios, based on their personal need, ability and willingness to take risk.

A portfolio of stocks should be globally diversified, which means that there should be a significant allocation to international stocks, emerging markets, small company stocks, as well as real estate.  A diversified portfolio is not just the S&P 500 index fund.

Remember that over time, the vast majority of mutual funds and money managers do not beat their benchmarks.

Do not take risk with bonds.  Only buy very high quality.  Reaching for the higher yielding, but less quality bonds, is not a good practice.  Fixed income is the place to be very safe.

Expect the unexpected, and plan for it.  Talk to your clients about bad markets as well as good markets.

Assist your clients in remaining disciplined, especially during down markets.  If they do this, they will be well rewarded, after a market downturn, when the market rebounds.

It is impossible to accurately time the market.  It is almost impossible to be right twice, as to when to sell (get out of the market) and then again (when to buy back into the market).

Rebalancing is crucial to long term success.  When an asset class does well, sell some of it.  Use the money to buy an asset class that has not done well.  This leads to buying low and selling high.

Plan with your clients (and have a simple written document), so your clients can achieve a sense of financial comfort and security.

Buy individual bonds, if practical, or CDs of very high quality, only, which will work well if interest rates rise or fall.  Bond mutual funds will not do well if interest rates rise.

5 years in the future, June 2016: What advice would I give now, to myself, for 2016?

Provide financial advice to your clients that is always in their best interest.

Be sure that your clients have well diversified portfolios, based on their personal need, ability and willingness to take risk.

A portfolio of stocks should be globally diversified, which means that there should be a significant allocation to international stocks, emerging markets, small company stocks, as well as real estate.  A diversified portfolio is not just the S&P 500 index fund.

Remember that over time, the vast majority of mutual funds and money managers do not beat their benchmarks.

Do not take risk with bonds.  Only buy very high quality.  Reaching for the higher yielding, but less quality bonds, is not a good practice.  Fixed income is the place to be very safe.

Expect the unexpected, and plan for it.  Talk to your clients about bad markets as well as good markets.

Assist your clients in remaining disciplined, especially during down markets.  If they do this, they will be well rewarded, after a market downturn, when the market rebounds.

It is impossible to accurately time the market.  It is almost impossible to be right twice, as to when to sell (get out of the market) and then again (when to buy back into the market).

Rebalancing is crucial to long term success.  When an asset class does well, sell some of it.  Use the money to buy an asset class that has not done well.  This leads to buying low and selling high.

Plan with your clients (and have a simple written document), so your clients can achieve a sense of financial comfort and security.

Buy individual bonds, if practical, or CDs of very high quality, only, which will work well if interest rates rise or fall.  Bond mutual funds will not do well if interest rates rise.

Conclusion: Do you see the pattern?

 

8 Things That May Surprise You for 2015

  •  US auto and truck sales have been outstanding in 2015.  Chrysler is at the highest level since 2005 and Ford had their best July since 2006.
    • The average age of vehicles on the road is now 11.5 years old, a record length.
    • New vehicle sales were 12.7 million in 2011, 16.5 million in 2014 and should exceed 17 million in 2015.
  • The US and world stock markets have been volatile recently.  This should NOT be a surprise.
    • Stock markets can be volatile, especially over the shorter term.
    • For 2015, the S&P 500 is down less than 1%.
    • From 12 months ago, the S&P 500 is up over 2%.
    • On Thursday, the S&P closed at 2,036.  Three years ago, it was around 1,400.
      • That is a 45% increase.  Does that surprise you?
      • Does that help you to focus more on the long term?
  • Amazon’s market capitalization (value of all shares of its stock) is $242 billion.
    • Amazon’s 2014 net sales were less than $100 billion, and lost money for 2014.  Amazon reported $92 million of profits for the 2nd quarter of 2015.
    • Wal-Mart had revenue of $482 billion for the fiscal year which ended January 31, 2015.  Net income for the year was $16.4 billion.
      • Wal-Mart’s market capitalization is now $221 billion, which is less than Amazon’s.
      • It is hard to predict the future success of a company and their stock.  The stock market clearly feels that Amazon will one day be more financially successful than Wal-Mart.  Time will tell if these valuations are accurate.
  • The price of crude oil has dropped from $57/barrel at the beginning of 2015 to approximately $41/barrel today.
    • The US Energy Information Agency “Annual Energy Outlook 2015” predicted prices well above $50 per barrel, with “prices to rise steadily after 2015” up to $80 per barrel in 2020.  Their “high oil price” scenario predicted $122 per barrel for 2015.
    • This shows how difficult it is to make forecasts and why predictions should generally not be followed in making investment decisions.
  • The 10 year total annualized return for General Electric stock is .06% per year (almost 0% per year), through 8/19/2015.  GE stock purchased for $1 million 10 years ago would still be worth about the same today.
    • During the same 10 year period, the S&P 500 has returned 7.73% on average per year.  The same $1 million invested in the S&P 500, 10 years ago, would now be worth $2,020,000.
    • This shows the risk of investing in one stock.  Even though a company is considered to be “blue chip,” it may not be successful stock to hold forever.
  • The Federal Reserve was widely expected to increase interest rates this year.
    • The 10 year Treasury Note was 2.173% on 12/31/14.
    • The yield has actually gone down, not up, and is now 2.085%.
    • Predicting short term interest rate moves is very difficult and why we build balanced fixed income portfolios.
  • The top US individual income tax rate is 39.6%
    • In 1977, the top tax rate was 70% for income above $203,200.
    • In 1982, the top tax rate was 50% for income above $85,600.
      • Did you realize how much this has changed and how high rates were a few decades ago?
  • US crude oil production is around 9.4 million barrels per day.
    • Production almost doubled from 5 years ago.
    • In 2010, 5.5 million barrels were produced per day.
      • This would not have been predicted.  Great technological breakthroughs led to production increases and will have significant societal impacts.
It should not be a surprise that we, as a society, are continually surprised by what the future brings. Uncertainty is always with us. Our investment approach is designed to help you effectively deal with this uncertainty.

 

Note: The sources for this blog post are available upon request

Should You be Worried?

Should you be worried about the stock market right now?

Should you be concerned about the uncertainty regarding China or the Federal Reserve’s future moves?

You could be worried or concerned, but you don’t have to be. You should not worry, if you have taken the right steps to develop a proper and well diversified portfolio.

If you have a solid allocation of fixed income (meaning bonds, cash and CDs), then you should have adequate resources that will last you for many years, regardless of the ups and downs of the stock market. This is how we help to plan for our clients.

Having an appropriate allocation of fixed income securities in your portfolio should allow you to sleep well at night, regardless of the day-day volatility of the stock market. This should be your foundation,
which you can live off of for many years.

We do not think that the events of today, or the “crisis du jour,” should cause any major changes to a globally diversified portfolio that we have structured. There will always be events in the economy or world that can cause you to worry, if you allow them to. There is always the unknown of tomorrow. Our role is to help you cope with the events of the world, so you can adhere to your financial plan. This will lead to your financial success.

Warren Buffett was on CNBC earlier this week, as he announced Berkshire Hathaway’s purchase of an industrial manufacturer of airplane and oil & gas parts. When asked whether people should be looking to sell in the short-term, his response was classic Buffet.

Buffett’s response was something like this:

If you thought that your house would go down 5-10% in the next few months or year, or had already gone down, and you are worried about it, would you pack up your family, sell the house and move?

Think about Buffet’s analogy. Of course you would not sell your home based on short term worries. It would be difficult, time consuming and….the price may not even drop, as you thought may happen. And more importantly, the price of your home will very likely rebound and go even higher in the future.

It is much easier to worry about stock prices than it is to sell your house. There is constant analysis and opinions on which way the market will go and how you should react to each new tidbit of economic news
or earnings report.

We can’t stress enough the importance of having a very well diversified portfolio, ignoring the short-term “news” and for you to focus on the long-term.

If your portfolio is not well diversified….yes, you should be worried.

If you have major investments in individual stocks….yes, you should be worried.

If you are heavily invested in energy stocks…..yes, you should be worried.

If you need lots of cash in the short term, and that money is currently in stocks…..yes, you should be worried.

If you are a client of ours, you should not be worried.

If you are worried or want a second opinion about your investment portfolio, let’s talk about your concerns.

Are You Earning The Right Airline And Credit Card Rewards?

Redeeming airline frequent flyer miles for free flights is already difficult, and it is going to be getting even harder.

In an excellent New York Times article, “Guesswork in Cashing in Delta’s Frequent-Flier Miles,” personal finance columnist Ron Leiber highlighted that Delta, in particular, is making it harder to obtain information about redeeming frequent flyer miles and will be making further program changes for travel after June 1, 2016.

Delta recently issued a statement, saying “for travel on or after June 1, 2016, the number of miles required will change based on destination, demand and other considerations. But most Award prices will remain unchanged.” As Leiber criticizes, Delta did not provide any further details.

Our thoughts and recommendations:

You should evaluate how to get the most benefit from your travel and credit card spending. What has been best in the past may not be the strategy you should continue in the future.

The theoretical “standard” that 25,000 frequent flyer miles will get you a free flight is a thing of the past. A Delta spokesperson in May stated “you’re going to see that completely change.”

Based on Delta’s statements, you should try to redeem Delta frequent flyer miles as soon as possible. It will likely be advantageous to redeem them for travel before June 1, 2016. This may also apply to other airline reward programs, as they may also impose stricter redemption criteria.

You should determine how best to accumulate and use credit card reward benefits. The optimal strategy may be different for each person, based on their spending, travel habits and locations. The key is to think about this and decide what is best for you.

It makes sense to have a credit card that can provide you with perks such as free checked baggage, which Delta’s American Express card provides. But that does not mean you then need to use this as your primary spending card. You may be able to get better overall benefits than accumulating Delta travel miles from this card.

Using credit cards that offer cash back may be more valuable than frequent flyer airline miles. Some credit cards offer 1-2% in “cash back” for credit card spending, in addition to bonuses that can be as high as 5-6% at varying times and for selected types of purchases. Credit cards such as Chase Freedom and Discover offer these benefits, but these added perks must be activated quarterly. Certain Capital One credit cards offer 1.5% in cash back. You need to research these, as offers and benefits change.

As Leiber’s article points out, you should be trying to get a benefit of at least 1%, if not closer to 2% on your credit card and frequent flyer points. It can be very difficult to calculate the real value of airline and hotel award points. We think credit card cash-back rewards may be worth more than airline frequent flyer miles, which can be hard to use and determine if you are actually getting at least 1-2% value. Leiber’s article cites a few websites that provide more detailed information on this topic.

Hotel reward points and perks may also be more beneficial than airline frequent flyer miles, particularly if you also use a hotel’s branded credit card. If you do travel frequently and stay at certain hotel brands, it may make sense to use that hotel’s branded credit card. This can provide you with significant benefits, like immediate or quick free points (= free room nights), additional points for each stay, elite status (like room or club level upgrades) and other benefits.

Other credit card and related recommendations:

 * If you have a credit card that offers quarterly benefits, like Discover and Chase Freedom, make sure you activate these benefits each quarter. They can send you an email alert quarterly, which simplifies this.
* Redeem your cash back points. If you are accumulating cash back on a credit card, you don’t need to let the cash back balance to keep growing. For example, redeem your money every 3 months.
* Try to use your frequent flyer points in the near future, to test their availability and quantify the benefit, as well as to use them before they lose even more “value” in 2016.
* A premium credit card with an annual fee may make financial sense, if you actually utilize the “extra” benefits.
* Read the fine print and understand all the benefits of your credit card or reward program. Some provide benefits in case of overnight airline cancellations, club level upgrades (which can be a $100-$300 per night benefit), and airline incidental refunds (including for in-air Wi-Fi, food purchases and extra baggage fees).

 

If you want to know what’s in my wallet, or discuss what is in your wallet, let me know. I’d be happy to discuss this with you.