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?

 

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