Lessons from Warren Buffett, 2019

Warren Buffett’s Berkshire Hathaway Inc.’s 2018 Annual Shareholders Letter was released last Saturday morning. This letter has been required reading for me for as long as I can remember. There are always lessons to be gleaned from his letter which can help all of us to be better investors and smarter financially.

Below are my comments, followed by selected portions of Buffett’s writings (in italics) from the 2018 Berkshire Hathaway Annual Letter.

WWM: It is clear that Buffett realizes that not all of his investments will succeed. He knows that many of the companies, or trees as he refers to them below, will not be able to adapt and be successful in the future.

  • Buffett: Investors who evaluate Berkshire sometimes obsess on the details of our many and diverse businesses   – our economic “trees,” so to speak. Analysis of that type can be mind-numbing, given that we own a vast array of specimens, ranging from twigs to redwoods. A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty.

Buffett knows that having ample cash on hand is critical for Berkshire, but is important to our clients as well. We often stress to clients that having many years of their annual withdrawal needs in fixed income should enable them to be able to sleep better at night.

  • Berkshire held $112 billion at year-end in U.S. Treasury bills and other cash equivalents, and another $20 billion in miscellaneous fixed-income instruments. We consider a portion of that stash to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities. We have also promised to avoid any activities that could threaten our maintaining that buffer.
  • Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.

Berkshire Hathaway grew in value during the 1970s through the early part of this century based on Buffett’s stock investments in many large US companies, as well as the success of its vast insurance companies. During most of this century, he has focused more on buying large companies outright, as well as making many opportunistic investments during times of crisis, such as during the financial meltdown of 2008-09. Now he has had to focus more on stock purchases again, due to the higher prices of buying companies outright.

  • In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.
  • That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities. We continue, nevertheless, to hope for an elephant-sized acquisition.

Buffet does not try to make predictions or forecasts on the short term direction of stock prices, and does not pay attention to other short term issues, such as the Federal Reserve and economists. We agree with this approach!

  • My expectation of more stock purchases is not a market call. Charlie (Munger) and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price…
  • Charlie and I do not view the $172.8 billion…. (their 15+ top stock investments) as a collection of ticker symbols – a financial dalliance to be terminated because of downgrades by “the Street,” expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.

Due to their large insurance business, Berkshire has built up huge cash and investment reserves, called float, which is the excess of premiums paid to them greater than the claims they have paid out. Berkshire is well prepared with funds for a major insurance loss, as we want you to be prepared for stock market declines. Both will occur. You just don’t know when a huge insurance loss or market decline will occur or the cause, in advance.

  • As I have often done before, I will emphasize that this happy outcome (the build up of insurance float) is far from a sure thing: Mistakes in assessing insurance risks can be huge and can take many years to surface. (Think asbestos.) A major catastrophe that will dwarf hurricanes Katrina and Michael will occur – perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as a hurricane or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate. When such a mega- catastrophe strikes, we will get our share of the losses and they will be big – very big. Unlike many other insurers, however, we will be looking to add business the next day.

In his letter, Buffett tells how he started with his first stock investment in 1942. He emphasizes the importance of savings and the compound effect of the long term growth of US companies, despite political and other challenges over the decades. He attributes some of his success to “The American Tailwind,” but hopes there are bright futures worldwide and stresses that we all benefit if countries around the globe “thrive.”

  • If my $114.75 (in 1942) had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1.
  •  Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3.25 ounces of gold with your $114.75.
  •  And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.
  •  Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history….
  •  Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make such claims.
  •  There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.
  •  Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.


Source: 2018 Berkshire Hathaway Annual Shareholder Letter, released Saturday, February 23, 2019. See Berkshirehathaway.com.

Disclosure: Brad Wasserman, author of this blog post, owns a small number of Berkshire Hathaway shares, which were purchased to enable me to attend Berkshire’s annual meeting. All my other stock investments are in DFA mutual funds, which is one of the primary mutual funds companies that we recommend to our clients.

The Real News About Charitable Deductions

There seems to be some mis-understandings about the tax deductibility of charitable contributions due to the Federal tax changes that were enacted in late 2017, which are now effective for 2018 and going forward. Let’s try to clarify this matter.

There were no changes in the new tax law that specifically affected charitable contributions. 

What changed is whether you can itemize or not.

We know that the financial world is continually changing. We know that the tax laws changed, and we hope this information provides you with clear and useful information. We want to help you overcome complexity and enable you to make better financial decisions.

If you can itemize, which means that your various deductions total more than the increased standard deduction amount, then you would continue to get a direct tax benefit from your charitable contributions.

The Tax Cut and Jobs Act (TCJA) vastly increased the standard deduction amounts. The 2018 and 2019 standard deductions amounts are as follows, respectively:

  • Filing Single….$12,000 and $12,200
  • Married Filing Joint couples….$24,000 and $24,400
  • Head of Households….$18,000 and $18,350

What is deductible to determine if you can itemize has changed, but how or what charitable contributions can be deductible has not changed.

  • State and local taxes, such as property taxes and state income taxes are now limited to $10,000 per year (previously, there was no limit).
  • In general, mortgage interest is still deductible.
  • Most miscellaneous itemized deductions have been eliminated.

If the total of your deductions exceeds the standard deduction amount for the filing category that is applicable to you, then you would benefit from itemizing. And if you have charitable contributions as some of your deductions, then you would get a tax benefit from those contributions.

If the total of your deductions is below the standard deduction amount that is applicable to you, then you would not be getting an incremental tax benefit from your charitable contributions.

If you are married, your standard deduction amount is $24,000 for 2018. If a couple paid $10,000 of state and local taxes and had mortgage interest expense of $10,000, any charitable contributions above $4,000 would enable this couple to itemize. If they made $10,000 in charitable contributions, which includes cash and property contributions, like used clothes donated, they would benefit as their total deductions would be $30,000.

If the same deductions were made by a single person, the $30,000 of deductions would far exceed the standard deduction amount of $12,000, and clearly this person would itemize and benefit from their charitable contributions.

This is really a case specific issue. Each person or couple will need to review the impact of the new tax law to their own specific situation and determine the impact on their deductions.

What we want to clarify is that many people will continue to be able to itemize and will continue to get real tax benefits from their charitable giving.

If your deductions are going to be far above the standard deduction amount each year, then you should continue with your annual charitable giving, as the tax law change really will not impact the deductibility of your charitable contributions.

Bunching strategy…

If you do not think you will exceed the standard deduction amount each year, but could be close, then more planning may be beneficial. In this situation, we recommend that you consider bunching your contributions every other year, if that will help you exceed the standard deduction amount every other year.

For example, let’s say a couple will have $15,000 of deductions in 2019, not including their charitable contributions of around $8,000 per year. If they make the charitable contributions each year, they would have $23,000 of deductions, and thus utilize the standard deduction amount of $24,400 in 2019.

However, if they bunch the contributions into an every other year cycle, they would get a significant benefit. If they gave most of the prior annual contributions of $8,000 into one year of $16,000 of contributions and then skip making most of the contributions in the following year, they would get a significant tax savings.

In the above example, they would have $15,000 of deductions in 2019, not including charitable contributions….and would still get the $24,400 standard deduction amount. In the next year, they would have deductions of $31,000 (the $15,000 + $16,000 of bunched charitable contributions), which would far exceed the 2020 standard deduction amount. You probably cannot or would not want to skip some contributions in a year, but you could let the charity know your plans, if they are counting on your annual gift.

If you have questions about this topic, you should consult with your tax advisor and review the figures.

For more advanced or significant charitable tax planning and giving concepts, please contact us. We have advised many clients on charitable giving and the interaction with their investments, estate planning and retirement accounts. This is a high value service we provide.

Obviously, charitable giving is a very personal matter.

We hope that you give to charities which are important to you and will continue to support their worthy causes and efforts, regardless of whether you get a tax benefit under the new tax law.

We welcome you to share this blog post with others, so they will have accurate information about charitable giving.

Let’s Talk

Will you even remember this occurred?

Late last year, most global stock markets dropped sharply. On Christmas Eve, the US markets had their worst Christmas Eve ever.*

Since Christmas, 2018, worldwide stock markets have risen dramatically and have recouped a large portion of the late 2018 decline.

In 66 trading days leading up to Christmas Eve, the S&P 500 declined 19.8%. However, in the 33 trading days December 26th to February 13, 2019, the S&P 500 has increased 16.6%.**

The chart below represents the above trading period, from 09/20/2018 to 02/13/2019.***

 While we believe that holding a broadly diversified global portfolio is in the best interest for most long term investors, I’m using the S&P 500 only for the illustrative purposes in this blog post, even though the S&P 500 consists of only US based large companies.

Global stock markets have increased significantly over the past 7 weeks despite many concerns about trade issues, the US government shutdown and worries about slowing economies in the US and globally.

This is a good reminder that even though you and others may be worried, and rightfully so, it does not mean that the stock market has to decline at that same time you have worries. The past few months are a terrific example of why we often remind you to focus on the long term, and not on the short term.

We believe it is nearly impossible to consistently and accurately time the stock market, to know when to get out and then when to get back in. You have to be right twice. To be a profitable market timer, you have to be able to do that over and over, and be correct to time the high and low points. This is not a game we advise you to play.

Though it can be difficult to handle markets when they decline quickly and sharply, we recommend that you adhere to your personal stock allocation plan, and not react to short term fluctuations and volatility.

Do you remember the decline in stocks which occurred in early 2016? Do you remember what caused this….3 short years ago? I assume that most of you do not remember that decline.

Just to refresh your memory, it was because of worries about China’s economy in January of that year. By early February, 2016, worldwide stocks began to climb again.

Three to five years from now, most investors will likely not clearly remember the late 2018 drop in stocks. It may have been worrisome for you to experience, as most major declines are scary to experience. But over time, the markets generally recover and go higher. And the memory of these declines fade.

But if your focus is on your long term future and long term financial plan, you will realize that declines like this are normal.

If you are in retirement, this is why we discuss with you the amount of fixed income savings that you have, and how long that can last you. We refer to this as your “Foundation.” For example, assume you are withdrawing around $80,000 annually from a $2 million portfolio. If you have $1 million of that portfolio in fixed income investments (50%), then you have over 12 years of annual withdrawals which are not subject to the volatility of the stock market….and that is without even including any interest on the fixed income investments. So you would really have 13 or more years of safe funds to rely on for your annual living.

If you think like this, you will hopefully be better able to tolerate the down periods in the financial markets, as you would know that you don’t actually need the stock portion of your savings for many, many years, for at least a decade in the example above. Thus, while the decline of 2018 was not pleasant for anyone, with this type of framework, you would realize that it is not directly impacting your current ability to live or your future standard of living.

It is this type of perspective and planning that we strive to develop with you, based on your age, income, expenses and savings.

We cannot predict when future major declines will occur, but we know there will be major declines in the future. On average, a major decline of around 20% or more occurs at least once every 5 years.

We want to work with you to develop a financial plan that begins to resolve your financial issues and concerns, such as how much money you may need to retire. And then we want to provide you with a plan and solution to live through your retirement years with the goal of reducing your stress that is related to financial issues.

We cannot eliminate down periods of the stock market. But we can work with you so you can strive to better handle down periods.

Let’s Talk.

*“The Stock Market just booked its ugliest Christmas Eve plunge-Ever”MarketWatch.com, by Mark Decambre, 12/24/2018

**“Stock Market Counterfactuals”awealthofcommonsense.com, by Ben Carlson, 2/08/2019

***S&P 500 ChartMorningstar.com

Realistic expectations

Helping you to develop realistic expectations can be one of the major benefits of working with a financial advisor.

We can help you to determine what you can realistically expect to live off of during your retirement or how much is a realistic amount that you need to save for a financial goal, such as college funding or your retirement.

We realistically expect that the future is uncertain. We know that finances can be confusing and difficult to understand. It is realistic for you to ask us in assisting with all the uncertainty and complexity and provide you with realistic solutions.

You are not being realistic if you plan to withdraw 7-10% annually of your investments during your retirement years. Academic research guides us to advise you to a more realistic annual withdrawal percentage, such as 4-5%. If you have a $2 million dollar portfolio, you should be able to comfortably withdraw $80,000 per year with a diversified and balanced portfolio and not run out of money.

Realistic expectations should include being prepared for bad periods of the stock market. We remind clients that the stock market has declined around 20% or more, once every 5 years, on average, since World War II. If you are not mentally prepared for this type of decline, which can occur at any time, even when you least expect it, you may not have realistic expectations.

You can realistically expect us to provide you advice that is in your best interest, even if it’s not in our best interest. We have a legal obligation to act as a fiduciary, to provide advice that is in your best interest. It is important that you understand that other types of financial professionals may not have to adhere to this higher standard of advice. Most national brokers and financial consultants working at a bank or insurance company do not have to act in your best interest.

We believe that in the long run, having a globally diversified portfolio will provide you with greater expected future returns than holding a portfolio of just large US stocks, such as the S & P 500. However, we want you to realistically expect that there may be periods or years when a US based portfolio will outperform a globally diversified portfolio.

We believe that in the long run, owning a globally diversified portfolio, with a tilt towards small companies and value companies, both in the US and Internationally, will provide you with greater expected returns. However, we want you to realistically expectthat there may be periods or years when these small and value “premiums” do not appear.

We encourage you to ask us questions and for guidance about a wide range of financial areas, so you can strive to be more financially realistic and make good decisions.

We think the more realistic that you are, the better long-term investor that you will be. And hopefully, happier, more secure and more successful.

Let’s Talk

What do you need?

You may want investment advice. Or you may have other concerns or issues.

You may have various investments that are not coordinated and lack a plan. We can help you put these pieces of the puzzle together. We can coordinate and help you see the big picture. We can strive to provide you with clarity and perspective.

Planning for a successful retirement can be a daunting task. We can guide you through this complexity. Together, we can work towards increasing your chances of meeting your financial and retirement goals, as well as trying to reduce your financially related stress.

We listen. We are empathetic. We have expertise and experience.

You may be uncertain about the future. We can guide you through the maze of options, such as how to fund college costs or the various retirement savings and 401(k) plan choices. We will strive to increase your confidence and help you to worry less.

We have clients with all kinds of needs. Everyone faces different issues. We can work with you to identify these problems or issues, then develop solutions. We can then guide you with ongoing advice, throughout your life.

You may have recently lost a spouse. You may not be experienced in dealing with financial matters. We will listen to you and help you to clarify your concerns. We will then patiently guide you, with the goal of reducing your worries and providing you with excellent advice that is always in your best interest.

We want to help you make progress and strive to resolve your financial worries.

We want to build trusting relationships.

It all starts with a conversation.

What do you need to talk about? Let us know.

Investing with a Shutdown and Uncertainty

The current partial Federal government shutdown that now extends over 30 days is another example of the type of uncertainty that investors must deal with.

Investors never know what kind of news is coming next, as no one can predict the future.

Investors sometimes say they will invest more in stocks or get into the market when there is “less uncertainty.” When will that be?

Is there ever a period where there is no uncertainty? We don’t think so.

There may be times when the markets are not as volatile, where there are not wild day-to-day swings…but that does not mean that the markets are more “certain.”

When can you really be certain about the near-term direction of the stock market? We don’t think that you can truly be certain about the short-term direction of the stock market, whether its US or global stocks.

If investing in stocks is uncertain in the short term, say days, weeks, months or even a few years, then you must develop a way to handle the uncertainty and volatility that comes with investing in stocks.

We think the best way to cope with the uncertainty in stock investing is to develop what we refer to as a rationally optimistic and long-term mindset.

  • You should strive to focus on the long term and not on day to day news events.
  • You should not focus on whatever the current issues or crisis that the financial markets are dealing with and not try to analyze what the ramifications are or could be.
  • You should focus on what you can control, such as the percentage of your assets that are allocated to stocks, not on things which you cannot control.
  • You should remember that in the long term, stocks have trended higher, not lower. Stocks have had more up years than down years. This leads us to be rationally optimistic for the long-term.
  • You should talk with a financial advisor who could help you deal with the uncertainty that is inherent in investing.

While we cannot predict when the government shutdown will end or what the S & P 500 Index will be in 6 weeks, 6 months or 6 years, we can strive to help you deal with the uncertainty that comes with investing.

Talk to us. It could be beneficial to you.

The Impact of an Investment Icon

Jack Bogle may have had more impact on investing by individuals than any other person of our generation.

Bogle, the founder of the Vanguard Group, died Wednesday at the age of 89.

His impact was in the significant reduction of mutual fund expenses and other fees paid by investors, as well as being one of the moving forces in the acceptance of index investing.

For many investors today, primarily younger ones, the concept of fee-only investing and no load mutual funds may seem normal. For example, our firm only recommends investments that do not come with any sales charges, either when you buy or sell the investments.

However, if you go back a decade or two, and prior to that, mutual funds that were sold by major brokerage firms and most other financial institutions were sold with up-front sales charges that may have ranged from 5-7% of your initial investment, and some may even had back end loads, which would charge an additional fee if you didn’t hold the mutual fund for a long enough period of time.

Bogle was an innovator, or today, would be considered a disruptor. As the Wall Street Journal stated, Vanguard was “continually cutting the costs of investing… Vanguard’s asset weighted average fee has fallen in the past 20 years to .10% from .27%, according to Morningstar Inc. Many traditional funds still demand 1% or more.” **

We are strong believers in the general concepts which Bogle advocated. We recommend mutual funds and ETFs which have internal costs which are far below industry averages, yet still have solid investment performance over time. There is no question that the competitive presence of Vanguard is reflective in the management fees of the investments we recommend.

Bogle strongly believed in index investing, where an investor would own an entire market sector, such as the S&P 500, rather than buying a mutual fund which has a money manager that would try to pick and choose selected stocks based on the manager’s forecasts (active investing). He believed that a mutual fund which tracks an index, at a much lower cost than an actively managed fund, would be to most investors advantage, over time. He has been proven correct, as years of mutual fund data has shown that index or passively managed funds outperform active funds over time for nearly all US and International asset classes.***

While we do not generally recommend that all stock investments should strictly track an index, our use of asset class funds is a variation of the concept which Bogle is credited with introducing and making widely available. We feel that the type of investments that we recommend, asset class funds that don’t strictly adhere to an index and some which add tilts toward various investment factors, such as value and smaller companies, are taking his concept to the next level.

John Bogle was an extremely influential financial executive, who was patient and disciplined in his beliefs, which investors throughout the US have benefited from, even if they do not invest with Vanguard.

Thanks for your contributions to the investment industry John. You will be remembered and missed.

** “Vanguard Founder Dies at 89,” Wall Street Journal, print edition, page 1, January 17, 2019.

***See blog posts for SPIVA content, 10 Things You Should Know and 10 (or more) Things You Should Know.

The Power of Diversification

Since my junior year in high school, for nearly 40 years, I have read the Wall Street Journal almost every day it has been published.

For almost a month, I have carried an article from the Wall Street Journal around with me, because I wanted to share the story in our blog.  The headline read…. “GE….Burned Out..This is the story of how General Electric lost power.“**

When I read this article the weekend it was published, Saturday, December 15th, I knew I had to write about it.  The story of GE and its stunning demise was too important.   The article covered part or all of 8 pages. This was the longest article I can remember seeing in the Journal.

In August 2000GE was the most valuable company in the US, with a market value of nearly $600 billion. For perspective, Apple is worth $721 billion today.

While GE was worth $600 billion 19 years ago, today it is worth only $76 billion, almost one-tenth of its prior peak. The stock price has gone from a top of nearly $58 per share to a low of $6.61 and has recently climbed back to $8.76. GE has also cut their dividend dramatically, from 96 cents per share in 2017 to its current 1 penny per quarter, starting in December 2018.

The WSJ article highlights some of the errors and decisions which led to this dramatic downfall. GE was widely revered for its outstanding leadership and top executives, yet has suffered from many poor decisions and bad timing. If you are interested in management and business, I highly recommend reading this article. It is a real eye opener.

As I read the stunning details of GE’s demise and the many serious issues which they still face today, I thought about the lessons from the perspective of our financial advisory practice and some of our key investment philosophies.

We are strong advocates of broad diversification, across companies, sectors and geography. We generally do not believe in owning individual stocks as part of an investor’s core portfolio.  Declines as occurred in GE’s stock has occurred at other companies, and will happen to others in the future. This is why we advocate our philosophy of diversification.

One-time very successful companies can become stock market failures. And vice versa. There is no way to reliably predict which companies and stocks will be the most and least successful over the long term…say 5, 10, 20 years, let alone over months or a few years.

Sure, there are stocks which continue to do well and look like great investments, in hindsight. We feel that most investors would be better off owning broadly diversified funds, rather than trying to pick 10-20 stocks and concentrate their portfolio. The risk of a few stocks blowing up, such as what occurred at GE, is too great a financial risk for most people.

We must acknowledge that one of the downsides to our philosophy of broad diversification and asset class investing is that some of the funds that we recommend for our clients have owned GE in the past and a number of funds still own very small amounts of GE today.

This is the nature of asset class investing, which means that a mutual fund will own hundreds or thousands of stocks, based on the purpose or objective of that fund. The key is that rather than a stock like GE being 5 or 10 percent of your portfolio, a fund or ETF today may hold far less than 1% of GE in its portfolio. In this manner, your upside and downside of any one stock is limited.

While the WSJ’s reporting of GE’s past problems and future challenges is insightful, it should not be guidance for your investment decisions. The WSJ nor other financial media or Wall Street prognosticators did not predict the huge decline of GE in 2000. We cannot predict its future success or failure.

However, we feel that our strategy of broad diversification will minimize the impact of a single stock having a major negative impact on your financial future. We hope that brings good things to your life!


**Cite: “GE, Burned Out,” Wall Street Journal, print edition, page B1, December 15, 2018.(To view and have access to the article online, you must subscribe to WSJ or already have a WSJ account.)

Disclosure: GE stock is held in various funds that our clients may own. For illustrative purposes, as of 11/30/2018, GE is 0.105% of DFA US Core Equity 2 Portfolio, 0.281% of DFA US Large Company Portfolio, and 0.231% of DFA US Large Cap Value III. GE is held in additional mutual funds as well.

New Year’s Resolution for 2019 and every year

With the volatility that US and worldwide stock markets experienced during 2018, it is important to maintain your long-term asset allocation plan between stocks and fixed income.

Maintaining your asset allocation, and regularly rebalancing your portfolio, should be an annual New Year’s resolution, whether markets are going up or going down.

To maintain your asset allocation means investors should be buying stocks when markets have decreased, and incrementally selling stocks after significant market increases.

As stock markets went down in 2018, we have reviewed, and will continue to review, our clients’ portfolios to buy stocks, to rebalance their portfolios back to their planned asset allocation.

When stocks are declining, buying stocks may seem difficult. You cannot know if they will continue to fall further. Stocks may have dropped but we may still be in the midst of the decline. This is where discipline and having a long-term perspective can be beneficial.

By buying stocks to rebalance after a significant market drop, you are following the buy low, sell high strategy. This is where we as your advisor can add value to your long-term financial progress.

For example, if an investor had a $2 million portfolio that was allocated 60% to stocks and 40% to fixed income, their portfolio would be $1.2 million in stocks and $800,000 in fixed income.

If the stock portion of this hypothetical example declined 15%, then the stocks would be $1,020,000 and the fixed income allocation would still be $800,000, assuming no fixed income change.

The portfolio would now be worth a total of $1,820,000, so a 60% target allocation to stocks should be $1,092,000. To rebalance the portfolio would require selling $72,000 of fixed income and purchasing $72,000 of stocks to maintain the intended 60/40 asset allocation goal developed as part of the planning process.

If you are a client, we have designed a financial plan with you, which we call an Investment Policy Statement (IPS).

If you are not a client, do you have a financial plan? If not, maybe you should contact us and discuss why this is so important.

It’s important to remember that bear markets and down periods are a feature of the stock market. If we were to look back at every previous market decline, some investors would think it is an opportunity and other investors thought the light at the end of the tunnel was a truck coming the other way.

In each past instance, the truck coming the other way wasn’t the outcome. It’s likely that this is not the case now either. In other words, every past decline looks like an opportunity; every current decline feels like risk.


Resolve to rebalance as needed, or work with an advisor who does this for you.

Resolve to think long-term. Resolve to adhere to your long-term investment plan.

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.