Reflections on 2018

Another week in the financial markets. Another week of roller coaster ups and downs.

Last Monday, Christmas Eve, the markets were down based on speculation and fears because the Treasury Secretary called 6 top US bank CEOs on Sunday to confirm there was adequate liquidity in the financial markets. However, there was no previous worry about financial liquidity. This was another day in a brutal December and fourth quarter for most US and International asset classes.

Tuesday was Christmas. Peace and quiet. Calm. No financial market trading in the US.

Wednesday the US stock market roared back with the largest percentage gain of 2018, as the S&P 500 rose almost 5%. This was the largest point gain in the history of the S&P 500 and DJIA indexes, because they are at much higher point levels than they were in the past.*** The DJIA surged more than 1,086 points, for its first ever daily gain of more than 1,000 points.****

Some thoughts as 2018 draws to a close.

  • It is difficult to explain many of the moves of the financial markets in 2018, particularly since some of them are inconsistent with each other.
    • Maybe that is the key, that investor psychology, not facts or logic, can literally change on a dime, or within a few days. For example….
      • the price of oil has dropped by 40% since early October.
      • the Federal Reserve has increased short-term interest rates during 2018, yet the 10-year Treasury Note has declined from 3.23% on November 8th to around 2.75% today.
    • Both items are positive for the economy (except for oil companies), as oil and gasoline is cheaper, as are car, mortgage and corporate borrowings.
  • There was not significant, new financial data that should have caused the huge market increase on December 26th. It was pretty clear that holiday sales were strong prior to Christmas, so a few retail sales announcements on Wednesday would not seem to be the source of the rise in 499 of 500 S&P 500 stocks.
    • Was this a change in investor psychology? Will it be short-lived or the start of a market rebound? We wish we had a crystal ball to know.
  • The huge rebound on Wednesday was a good example for our long-term belief of staying in the stock market and adhering to your financial plan. This is why we do not think an investor can successfully and repeatedly, over a long period of time, be able to predict when to get out of the market and when to get back in.
  • Stocks appear to track the growth of earnings and the expectations of future earnings, especially over the long term. In the short term, when a company announces an increase in actual or future expected earnings, the stock usually rises. If they announce lower actual or future expected earnings, the stock generally falls. This makes sense.
  • Despite economic, political, technological and other changes, corporate earnings in the US and worldwide have grown significantly over long periods of time. This is why we consider ourselves to be “rational optimists.”
    • For example, here are the year ended earnings of the S&P 500 for selected years:*****
      • 1990: $40.20
      • 2000: $72.42
      • 2001: $35.22
      • 2008: $17.84
      • 2010: $88.95
      • 2015: $92.21
      • 2017: $112.34
      • 2018: $150-160 (projected for the year 2018)
      • 2019: expected to be higher than 2018
    • Companies strive to be resilient. The ones that succeed figure out ways to adapt, change and grow their earnings.
    • It is hard to identify which ones will succeed, in advance and for decades into the future. It is also hard to predict which regions or countries, or stock markets, will outperform another, which is why we recommend investing in a globally diversified portfolio of companies.
  • There is talk of a recession. And there is talk of a slowing economy or slower growth. 
    • Let’s define the terms properly, as there are huge differences. According to businessdictionary.com, a recession is a period of general economic decline.
      • This is further defined as a contraction in GDP (economic output) for six months (two consecutive quarters) or longer. Recessions generally do not last longer than one year and are considered normal in a capitalist economy, such as the US and much of the world.
    • Why is this important? As many economists are predicting and discussing slower economic growth, few are predicting a near-term recession, or contracting economy in the next year.
    • If the US economy slows from 3% growth to 2%- 2.5% growth, that is still a growing economy, just growing at a slower rate. But that is not a recession.
  • We do not see signs of impending economic doom, such as preceded the housing bubble in 2008 and the subsequent stock market crash during that time period. While stocks in the US may have been overvalued by some measures earlier in 2018, they are much cheaper now. And stocks overseas are even cheaper on a valuation basis than broad US markets.

While 2018 has been a challenging year for most investors, we still believe in the fundamental investment principles which we have recommended and adhered to since we founded our firm over 15 years ago.

We still believe in….

  • Globally diversified portfolios of asset class mutual funds
  • Minimizing your costs
  • Investing in asset classes with greater expected returns than the S&P 500 over the long term, such as small value, International and Emerging Markets
  • Preparing an individual Investment Policy Statement, which allocates your portfolio between stocks and fixed income, based on your needs, goals, time frame and risk tolerance.

We are available to meet and talk to you when you have any questions or concerns. We know that declines in financial markets can be difficult for some to deal with.

Regardless of what happens in the world and in the financial markets, we will be here for you. We will be writing these posts weekly, to help you try to understand what is going on in the economic and financial world, so you can continue to work towards your financial goals.

 

We wish you and your family a Happy and Healthy 2019!

 

*****multpl.com, “S&P Earnings by Year“, Note that the companies in the S&P 500 change frequently, so the earnings in these figures are from different companies at different times.

 

 

 

Is the Fed acting like Grinch?

The Federal Reserve on Wednesday again increased short term interest rates by .25%, which is the fourth such increase of 2018.

This move was widely anticipated (and telegraphed by the Fed) for weeks, but recent financial circumstances made the action surprising to many analysts.

We always stress that investors need to be focused on the long-term. At times, writing this blog weekly feels like we are focusing on the short term. However, we feel that it is important to share our thoughts and analysis about current market news and actions.

So while we want to wish you Happy Holidays, Merry Christmas and a Happy New Year….the financial markets are not filling investors stockings with good cheer.

Global stock markets have declined dramatically during the fourth quarter, affecting nearly all asset classes, in varying amounts.

The price of oil has dropped over 35% since early October, due to concerns of slowing economic activity and supply increases, particularly in the US.

What do we think? Does the Fed action make sense? What happens from here?

We have often explained that the Federal Reserve has a dual mandate, to encourage full employment and price stability, which means to maintain inflation around 2%.

Unemployment in the US is at all-time lows and inflation is at or below 2%, and not likely to increase soon given the large decrease in oil prices. Based on the current data, it may be hard to understand why the Fed increased short term interest rates on Wednesday.

The US stock market reacted negatively after the Fed’s written announcement and press conference, as the Chair explained that Board members still predict two .25% rate increases in 2019. However, those are predictions and they are subject to change, based on future economic conditions. The currently projected two increases for 2019 is reduced from their internal projections earlier this year for three 2019 increases.

The Fed acts independently and we hope that their actions do not cause the economy to slow too much. The Fed is supposed to focus on their dual directives, and not react to the stock market or political pressures, which they are clearly not doing. Maybe the Fed sees the US economy as stronger than the stock market is fearing. The stock market can be very volatile and investor psychology can change quite quickly, as it has a number of times during 2018.

Short and longer term interest rates have nearly come together, as of Wednesday afternoon. This is called a flat yield curve. The 2-year US Treasury note yield is 2.68%, while the 10 year US Treasury yield is now 2.77%, declining from 3.24% as recently as November 8th.

The implications of these interest rate moves is that longer term borrowing is now cheaper than it was a month ago, which should be better for the housing and vehicle sectors, than 4-6 weeks ago.

In November, the stock market declined in response to the sharp rise in the 10-year yield to above 3.2%, but the stock market has not rebounded as longer term interest rates have dropped, due to slowing economic growth concerns.

We do not know what the stock market will do in the near future. We know that enduring losses is not easy. We wish we had a crystal ball, but we don’t.

We don’t know exactly what someone like Warren Buffett is doing right now. However, based on his past actions and speeches, we would assume that he and Berkshire Hathaway would be buyers, not sellers. He has often said it is wise to be “fearful when others are greedy and greedy when others are fearful.” In other words, when others are fearful and stock prices have dropped, it may represent a good time to buy, or at least, not a time to sell.

We feel that to reap the long-term benefits of investing in a globally diversified stock market portfolio requires patience and discipline. This is one of those times, where patience and discipline are encouraged. We feel that in the long term you will be rewarded.

We are here for you, if you want to talk to us, to review your portfolio or discuss your concerns.

Happy Holidays!

Why we recommend an Investment Plan

As a baker or chef, you would use a recipe.

As a football coach, you would develop a game plan.

As investment advisors, we believe all investors should use a written investment plan.

Having a written investment plan, which we call an “Investment Policy Statement” (IPS), may provide many important benefits to investors and can lead to a better relationship with your advisor.  But having an IPS is not a guarantee for investment success.

The IPS that we develop for each of our clients provides a framework for how their assets will be invested and managed over time. The IPS provides the initial asset allocation, based on a client’s financial situation, risk tolerance, time frame and goals, among other things. Before we begin to invest any client funds, we discuss the IPS with our clients and both the client and our firm signs the IPS.

Having a written investment plan, which helps to guide future decisions and actions, can assist an investor in understanding the advisor’s strategy. For example, our IPS addresses that the investment time horizon is long term (defined as longer than 5 years). Our time horizon and decision making are not based on daily market news or current events. Our IPS explains why we recommend utilizing a globally diversified portfolio and acknowledges that this strategy may not outperform certain indexes over various time periods.

We feel it is important that our clients understand these concepts before we begin to invest on their behalf. We try to educate our clients and discuss these concepts with them.

Having a written investment plan can be helpful in remaining disciplined during difficult market conditions or when current events seem to be negatively affecting financial markets. We generally do not make major changes to a client’s IPS based on the past performance of a specific asset class or because of future predictions or expectations.

We would (and do) modify an asset allocation (IPS) based on changes in someone’s life situation, such as changes in assets or as someone gets older. The key is that changes in the investment allocation are more driven by personal changes, whether good or bad, and not based on predictions about the future of the stock market, interest rates or politics. We strive to provide rational and evidenced-based advice, not decisions driven by emotions, guesswork or predictions.

Risk tolerance is also very important in planning and developing an IPS. We provide written information on how poorly the proposed allocation would have done over many decades in the past. Why do we focus on the negative, and not the positive? Because by showing someone how much a proposed asset allocation did during bad time periods (such as the worst one year to three year losses for a given asset allocation), we are trying to determine if the investor will be able to handle the potential downside of this allocation. We don’t want investors to abandon their investment strategy due to down periods, which will inevitably occur again and again, during an investor’s life.

Having a written investment plan can be an important and evolving document for your financial life.

Like a great recipe, if an Investment Policy Statement is well prepared and followed, it could lead to a good outcome.

We also hope that a written investment plan may help you be more confident and have a greater sense of peace of mind.

Handling the stock market roller-coaster

Investing in stocks can be like riding a roller-coaster.

You know the roller-coaster will go up and then you know it will go down.

But you don’t know what will happen after the first hill…….until you experience the ride. You have to endure the entire ride.

The roller-coaster experience is similar to the volatility investors are now experiencing  in worldwide stock markets.

Volatility means how much something goes up or down.

In stock market terms, the more volatile a stock or asset class is, the more the increases or decreases are, as compared to other stocks.

You will note that increases are part of the definition of volatility. But for most investors, they can easily handle the “volatility” of increasing stock prices.

It is the decreases (losses), such as have occurred recently, which cause most investors concern. Most investors dislike volatility when it is associated with down stock markets.

The 2018 decline should be considered normal, on a historical basis, even if it has not been enjoyable to experience.

You want to know why these losses are occurring and when they will come to an end.

We do not have good answers to these questions. No one really does. Sometimes markets react to all kinds of news, information and investor psychology.

Today’s message is that during times like these, investors need to be disciplined.This is when investors need to remember that losses are temporary, unless you sell your stocks in a panic.

It is nearly impossible to consistently time the markets, as it is quite difficult to predict both the decline in advance and call the bottom of a downturn. Thus, remaining disciplined and adhering to your personal Investment Policy Statement will likely prove to be a solid strategy over the long term.

Investors who have an allocation to fixed income should be re-assured, as that should provide you with cash and liquidity for your near-term spending needs.

This is when you need to remember that your stocks are long term investments…..and over the long-term, which is many years, you should expect positive returns from your stock investments.

 

We don’t know how long the down portion of this roller-coaster ride will be.

 

Buckle up. We are here for you for the duration of the ride….

 

If you have questions, you want to discuss the markets or the impact on your personal situation, please contact us. This is why we are here.

Market Update

We always encourage you to focus on the long term.

We plan and allocate your investments so that you will have adequate liquidity to meet your short-term financial needs.

We don’t know how the future will evolve, but we do our best to plan, knowing that the reality is unknown.

While stressing our long-term focus, sometimes analysis and thoughts about short-term market actions and news can be helpful to you.

In general, worldwide stock market indices have declined since September 30th. US and worldwide stock market indices increased in early November (see blog dated November 8, 2018), then declined most of November, with a strong recovery this week, since Thanksgiving.

The decline of worldwide stock market indices since September 30th can be attributed to investor psychology regarding the following:

  • Slowing global growth
  • Trade tariff impact
  • The huge decline of oil prices since early October
  • Concern about rising interest rates in the US (see the above cited blog post)
  • Valuation concerns about some sectors or individual stocks may have been overvalued

Most of our clients have significant fixed income allocations. For illustrative purposes, let’s say someone had a 50% stock and 50% fixed income allocation. Though the financial markets have declined for the year, a balanced portfolio would not be down double digits on a percentage basis for the year to date. While not what we expect long term returns to look like, it is not anywhere near the losses incurred in a major down market.

We remain confident in our major investment principles, which include:

  • Being globally invested for the long term
  • Using very low-cost asset class mutual funds and not individual stocks
  • Not trying to pick which stocks, sectors or regions will do best
  • Owning high quality fixed income and not junk bonds
  • Avoiding hedge funds and alternative investments, which lack transparency and can be very expensive
  • Over-weighting to value and small company asset classes

On Wednesday November 28, US Federal Reserve Chair Jerome Powell gave a key economic speech. He first discussed his outlook for the economy and interest rates. He then explained in-depth the Fed’s approach to monitoring and addressing financial stability. I found both aspects of his speech to be very insightful and they gave me confidence about the future.

While not everyone will be interested in the full speech, I highly recommend reading this speech, or at least the pages 1-2 about interest rates and pages 13-14 summarizing his thoughts about financial stability. The highlights of the first part of his speech are below. I will likely write about the latter part in a future blog post. The speech is very readable. It shows that the Fed is trying to effectively communicate, as well as look at the financial world and attempt to identify future problems before they become severe.

Powell explained that the Federal Reserve has two jobs, to promote maximum employment and price stability (keep inflation around 2%). He stated that “our economy is now close to both of these objectives.”

The real news which caused the stock market to increase significantly on Wednesday were his comments that the financial markets interpreted that interest rates will not need to be raised much further. He explained that while interest rates are still low historically, “they remain just below the broad range of estimates of the level that would be neutral for the economy-that is, neither (causing the) speeding up nor slowing growth.” (WWM inserted “causing the”)

Powell said he, along with his Federal Reserve colleagues, and many private sector economists, are forecasting “continued solid growth, low unemployment, and inflation near 2 percent. There is a great deal to like about this outlook. But we know that things often turn out to be quite different from even the most careful forecasts.” (Emphasis added)

Powell then went on to discuss the balancing act that the Federal Reserve has, that they are dealing with uncertainty and there is no pre-set path for future interest rate moves. Because no one can predict future events, which cumulatively will affect the Fed’s future interest rate decisions, Wall Street will play a guessing game and this leads to volatility in the financial markets. While all this occurs in the short-term, this is where we remain disciplined and focused on the long-term.

Our bottom line from this speech….

  • There will very likely be a short-term interest rate increase of .25% in December.
  • We stated in our November 8th blog post that there will likely be two or three .25% short term interest rate hikes in 2019. After this speech, it’s possible that there may less. The Fed will monitor and evaluate how the economy is performing and review its forecasts at each of their meetings.
  • Powell does “not see dangerous excesses in the stock market.” He made this comment in the latter part of his speech, when he was focusing on financial stability. He distinguished market volatility, which is normal and expected, from events that could threaten financial stability.

We hope this analysis is helpful to you.

If you have further questions, please contact us. That is what we are here for.

Giving Thanks

As we will celebrate Thanksgiving Day next week, we hope you appreciate the good fortune that so many of us have, simply by being born and able to live in the US.

Warren Buffett has often cited what he calls “winning the ovarian lottery,” which he feels Americans win the day they are born in the US. In lengthier speeches on the same topic, he cites the many aspects of your life which are determined at birth: the political and economic system you are born into, your health, gender, skin color and your level of intelligence.While our country is certainly not perfect, we are thankful for its many virtues and the opportunities it has provided to so many of us.

 

We are truly thankful and positive, and hope you are as well.

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We are thankful for our clients, who have placed their trust in our firm. We do not take your loyalty for granted.

We are very thankful for the referrals that our clients and friends have made to people they care about, so we can assist them and better their lives.

We are thankful for clients who have requested our advice on matters in addition to  investing and financial planning, such as helping them with life transitions, estate planning, real estate transactions and the sale of businesses.

We are thankful that our clients understand the importance of focusing on their long-term goals, and not on short-term market swings, as this will provide you with better long-term investment results.

We are thankful for our business partners and relationships, which help us to be successful and operate our business efficiently.

We wish all of you a very Happy Thanksgiving, and hope you are able to share it with those who are most important to you.

As you are reading this, I will hopefully be arriving in Athens, Greece, along with my two sons, to visit my daughter, who is studying abroad this semester. We will be staying in Athens, then going to Florence and Rome, Italy over the next week. 

Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday. The next email will be November 30th.

Rapid Changes……what they mean

From early October until October 29th, the S&P 500 declined approximately 10%.** Stock markets throughout the world incurred similar and even worse losses. While we recommend holding a globally diversified portfolio of stocks, we are using the S&P 500 for illustrative purposes here.

Since October 29th, stocks have rebounded significantly, recouping 1/2 to 2/3 of their losses, depending on the specific asset class.

These are some of the lessons from the past 6 weeks…..

  • Not reacting to news, commentary and dire stock market predictions is almost always the right course of action. Not reacting is actually a conscious decision.
  • Markets can and do change suddenly. You need to be able handle sudden movements and volatility.
    • While US large stocks were at near all-time highs in early October, and some thought they were “over-valued,” the swiftness of the decline was not clearly predictable.
    • In a similar manner, it was hard to predict the very quick and significant recovery that has occurred since the October 30th bottom.
    • Could you have accurately timed both the recent top and bottom of these moves?  We doubt it.
  • Our disciplined investment approach can be beneficial in the long term and short term. We adhered to our clients’ long term investment policies, and rebalanced accounts as appropriate.
    • For those who added funds during this downturn, we took this opportunity to buy low and rebalance to asset classes that have not been performing well.
  • This discipline of buying more of the poor performing asset classes makes sense, if you think of groups of stocks like items at a store which have gone on sale. They were now cheaper. Stocks after the decline represented greater values than they did when the prices were higher.
    • You buy things when they are on sale at a store, right? Stocks that have had quick declines, and especially if most things in the world have not changed that much, are like a sale at a store. Stocks that have dropped in price would now have greater future expected returns, so they are a better value at the lower price.
  • The most cited reason for the decline was the talk and action of the Federal Reserve to raise short term interest rates. While this may have been a cause, or contributing factor, it is hard for us to believe that institutions or retail investors did not anticipate the recent Fed moves or their projections for future interest rate increases. We think their actions have been well telegraphed and are quite reasonable, given the strong state of the US economy. The Fed funds target is currently 2-2.25%.
    • While we are not making interest rate predictions, we want you to realize that it is very likely the Federal Reserve will raise short term interest rates by .25% in December, and then at least two or three times in 2019, by .25% each time. Thus the Fed funds rate could be in the 2.75%-3.25% range by the end of 2019.
    • The two year US Treasury Note is almost 3% today. The Fed projections imply that the 2 year yield could likely rise to 4-4.25% by the end of 2019.
    • This means that for the fixed income investments of your portfolio, they will generate more income as your current investments mature and are reinvested at higher yields.
  • It is also hard to predict the movement of other assets, like the price of oil. In the past few weeks, the price of oil has declined by 20%, which is considered a bear market (drop of 20% or more). I don’t know of any financial institution that was predicting this type of decline. Most financial forecasters and bets in oil futures were predicting oil to go higher this fall, and certainly not far lower, based on Wall Street Journal articles over the past few days.
    • This decline in oil is good for the US economy for many reasons. It reduces inflationary effects, which may mitigate the cost of interest rate increases to borrowers. It enables consumers to spend more. It reduces material costs.
  • Many analysts cite the uncertainty preceding the midterm elections as contributing to the October decline. Clearly, removing uncertainty does help investor psychology. However, if uncertainty was part of the cause for the decline, why did stocks increase in the days before the November 6th election?
    • This re-emphasizes our long standing recommendation to avoid most political news when making investment decisions. While it may seem logical to want to factor politics into your investment strategy, it is not practical and often times will lead to poor decisions.
    • In our opinion, stocks are unpredictable in the short term. So don’t try to make predictions and take short term actions.
      • In the long-term, stocks follow corporate earnings and successful companies adapt and overcome political and other challenges.

The bottom line is that in the short term, stocks are volatile. That is why we develop your asset allocation to be appropriate for your goals and needs, as well as your ability to handle the short term risks and volatility of the financial markets.

We want you to be secure, so you have adequate funds to endure market downturns and be able to sleep well at night, regardless of how the stock market is performing.

 

**The Standard & Poor’s Composite 500 Index consists of 500 of the largest companies based in the U.S. The companies in the Index change frequently over time, as companies grow, fail, merge and get acquired.

How to be more secure and help your favorite charity

We want to donate to your favorite charity.

We want you to be more secure, financially.

And, we want you to be more secure on the Internet and how you use your passwords.

So just as the beginning and end of daylight savings time has become known as the time to change the batteries in your smoke alarms, we want you to start a new tradition. Daylight savings time ends this weekend, so set your clocks back an hour before you go to bed Saturday night. And change your smoke alarm batteries!

We strongly recommend that you use a password manager program, which should work in a coordinated manner on all of your devices, such as your cell phone, iPad or other computers.

I have used 1Password for many years and I highly recommend it. My son encouraged to begin using 1Password years ago and I cannot imagine living without it. It saves me time. I don’t have to re-type my passwords when I log into various websites. The program auto fills them for me. I have lots of very different, complex passwords and I don’t have to remember any of them. I don’t have my passwords written on a piece of paper in my desk or “hidden” in a notebook.

You should use 1Password or another program, such as LastPass and Dashlane. While the best programs are not free, the cost is relatively nominal (most are between $20-40). We think it makes sense for these applications to charge a fee, and even to have an annual charge, as they are keeping your data secure and they should be constantly improving their services, as well as keeping up with technology changes. For further information on various password manager programs, please see this article:  The best password managers of 2018. 

You should know that everyone in our firm now uses 1Password within our business, to store various passwords we need to maintain. That’s how important computer and password security is to us.

If you are not yet regularly using such a password manager program, we want you to start. If you are a client of WWM, and start using a password manager program by November 15th, we will donate $25 to your favorite charity.

That’s all you need to do is start using a password program and email Michelle Graham of our firm, mgraham@wassermanwealth.com. Let Michelle know that you have started to use a password management program and tell us the name and address of your charity. We will then make a $25 donation in your honor.

We will all benefit. You will be more secure, you will make your life easier and we will be helping a number of charities, we hope!

And if you are already using such a password program, we want to encourage you to start a new tradition. Twice a year, when daylight savings time begins and ends, we encourage you to change 10-15 of the passwords you use the most or are financially important. And if you have any frequently repeating passwords, those should be changed. You should not repeat passwords.

If you are a client of WWM, and you change 10-15 of your passwords by November 15th, we will donate $25 to your favorite charity (if you already are using a password manager program).

After you make your 10-15 password changes, email Michelle Graham, mgraham@wassermanwealth.com. Let Michelle know that you have done this, and the name and address of your selected charity. We will then make a $25 donation in your honor.

We care about you.

We care about the charities that are important to you.

And we care about your security on the Internet.

The next step is up to you.

We hope to hear from many of you in the next few weeks.

Will you act?

Reflections on the Week

Risk and return.

Uncertainty.

Climbing Mt. Everest.

How to be better investment advisors.

These were some of the topics of the 2018 BAM National Conference which I attended, along with Michelle Graham of our firm, over the past few days.

We heard from Alison Levine, who in 2002 was the captain of the first American Women’s Mt. Everest Expedition.  Her presentation was filled with many leadership and life lessons, which can also be applied to investing.

In building her team, Levine said the members’ techniques and ability were important, but willpower was the most important factor. To be a successful long-term investor, you will need to have willpower to endure down markets (such as we are experiencing right now), willpower to ignore the constant noise and financial predictions and willpower to stick with your financial plan (investments), even when they temporarily underperform some other stocks or asset classes.

Levine stressed the importance of confidence. She had to know that each of her individual climbers were confident of their ability to have a truly confident team. As your advisors, we are confident about our consistent investment philosophy. As a client, we want you to be confident in our investment strategy and philosophy, so you can adhere to it for years and decades.

To make this attempt to climb Everest, the American Women’s Mt. Everest Expedition required extensive planning, training and financial support. This was not a one person effort. The Women’s trip was sponsored by the Ford Expedition and not the Chevrolet Avalanche (get it?) …as both wanted to sponsor the venture.

We learned that before an Everest climber can attempt to reach the ultimate peak, they spend two months having to go up and down the mountain. (See the picture) They go from the base camp up to base camp 1, then back down to the base camp. Then up to base camp 2 and back down to the base camp. Then up and down to base camps 3 and then 4….before they are finally able to climb all the way and try to get to the peak. They are forced to endure this up and down process so their bodies can get safely acclimated to the thin mountainous air.

The climbers had to go backwards many times, so they could eventually go forward. Even when going backwards, they were making progress towards their goal. As in investing, sometimes the markets force you to go backwards (when the markets decline), before you can go forward (when the markets go higher, and then eventually reach new highs).

Various speakers discussed how risk and return are related, which of course we know.

Levine’s 2002 attempt did not make it all the way to the final summit. She was 28,704 feet above sea level, but due to storms that quickly developed, they were unable to trek the final 331 feet up to the peak. Did they fail? No! They had to make smart decisions. It was better not to take extra risk, in order to return …and live. That is the ultimate risk and return!

She returned to Mt. Everest in 2010 and finally made it all the way to the summit. She said she could not have done it without an extensive support team and the crucial experience she gained from her 2002 venture. We are part of your support and advice team. We have extensive experience, rely on market and academic data, and behind us, we have extensive resources that we can rely on, as needed.

We agree that risk and return are related. We discuss this with you, as we develop and evaluate your portfolio over time. One speaker expressed that due to US S&P 500 valuations as of September, 2018, the future expected returns for this asset class are quite low going forward, well below the historic average of 8-10% per year. He may be right, but there is no way to know. None of us has a clear crystal ball about the future. However, we disagree with his recommendation to invest in alternative investments which we find hard to understand, use leverage and make bets by shorting certain stocks (betting they are over priced and will go down). Some speakers advocated adding alternative investments to try to reduce the overall risk of a portfolio or to increase the expected returns. As of now, we are not in agreement that the risk of these alternative investments are worth the potential return. We are open to new concepts and ideas, but we must be confident in them before we invest our money and recommend them to you.

We also heard from another speaker, who spoke from the view of an investor.** He shared how years ago, it was difficult for him to deal with uncertainty, noise and the constant barrage of media predictions and warnings. This was before he began using his current advisory firm (not WWM) and investment philosophy, which is likely similar to ours.

He talked about how important it is for us as advisors to be good listeners. He stressed values that are similar to ours, such as “doing the right thing” and “doing it the right way.”  He discussed the importance of treating each client as an individual and understanding your personal emotions and feelings about money, as well as sharing our personal money stories. I plan to write about these topics in future blog posts and we will discuss them in client meetings.

He said that by working with his advisor, he became more comfortable with the uncertainty of the financial world. He began to tune out the noises. He worked with his advisor to make better financial choices. He realized that he can only control what he can control. He now knows that as a long-term investor, the investments and decisions he makes today will compound over time for great future benefits. He doesn’t know exactly how this will work out, but is confident that over the long term, he feels this is the correct philosophy to have.

We strive to provide the type of guidance and advice that the speaker described, so that our clients can also feel this way.

The speaker feels transformed by the relationship he has with his financial advisor. He refers to himself as a transformed investor. As a result of his new mindset, he is much more willing to refer his friends to his advisory firm, so his friends can be helped by his advisor and feel the way he does.

If you are a client, we hope that you feel this way about our firm, so when the situation arises, you can help your friends and relatives by referring them to us.

If you are not a current client, but want to have this type of investor experience and relationship, let’s talk.

 

**The speaker is not a client of our firm or BAM Advisor Services (our back office firm), so this is not intended as any form of client testimonial.

Cites:

2019 Social Security Benefit and Payroll Tax Increases

Social Security recipients will be receiving a 2.8% increase in 2019 benefits. Unlike in 2018, this benefit increase should not be offset by higher Medicare health premiums in 2019, so these should be higher net monthly benefits.

The increase in gross benefits would be the largest annual COLA change (cost of living allowance) since 2012, as inflation has been very low over the past years. Recent changes have been: 2018-2%, 2017-.3% and 2016-no increase.

The earnings limit for those who claim Social Security benefits before their full retirement age will increase from $17,040 to $17,640 in 2019. If this applies to you, you lose $1 benefit for every $2 earned in wages or earned income over $17,640.

In 2019, the maximum wage base subject to Social Security and Medicare taxes will increase $4,500, from $128,400 to $132,900, a 3.5% increase. This will cost employees and employers each $344.25 in 2019. Additionally, all earnings, even above the $132,900 Social Security maximum, are subject to a 1.45% Medicare tax. Plus, individuals with earned income above $200,000 and married filers with earned income above $250,000 pay an additional .9% in Medicare taxes.

 

This week’s Takeaway: Social Security is still vital for nearly all Americans. Annual payments can be $20-40,000, which is the equivalent of withdrawing 4% per year from an account value of $500,000-$1,000,000.

 

Source: “Social Security to get 2.7% COLA,” Investment News, Mary Beth Franklin, October 15, 2018.