Enough

Blog post #402

How much is enough?

How much money do you need, to have “enough”?

How much money do you need to support your standard of living?

How much money do you need to maintain your lifestyle, shop, travel, enjoy yourself, pay for medical expenses, support charitable causes you value….as well as provide financial support to children, grandchildren or relatives?

These answers are obviously very personal and will be different for each of us. One of the roles that we play as financial advisors is to help you, if you need it, to quantify how much money you will need in the future, to support the lifestyle that you desire.

In developing your investment plan, how you define “enough” is vital, as it defines your need to take risk. The more wants and needs that you desire, the larger the portfolio you will need to support your lifestyle. The more financial assets that you need, the more financial risk that you may need to take, and for how long, depending on what assets you already have and your ability to save.

If you already have adequate resources to support your lifestyle, then you would have less need to take financial risks. We would work with you to focus on maintaining your assets, taking intelligent steps to reduce your risks, such as being broadly diversified and determine an appropriate exposure to stocks. If you have already “won” the financial game, meaning you have adequate assets to meet all of your needs, your plan and strategy should be developed so that you don’t permanently lose a significant portion of your financial assets.

If you already have significant assets, then you should consider whether your portfolio has excess risk. Is the risk you are taking to reap potential stock market gains worth it, versus the potential negative outcome of financial losses?

A few things to consider. As your wealth and portfolio grow, some people convert what were once desires into needs or wants. Desires become expectations and reality. A vacation or trip that once seemed unattainable becomes an annual part of your life. You go from one home to wanting a vacation home. The nice car becomes a luxury car. These are all choices each of us make. Myself included.

These changes, which can occur gradually over time, can increase the need to take risk (and to save more), to cover the additional expenses as your lifestyle changes. If you need to take on more risk, you would need to increase your equity allocation. And that can lead to problems when risks appear, such as in 2000-2002 and 2007-08, and other time periods. While these losses were not permanent, they can be emotionally difficult without proper guidance, planning and your emotional ability to handle the risks and market volatility.

We advise clients when developing their investment plan and asset allocation. It is generally important to have some exposure to stocks, so your portfolio has some opportunity for growth which exceeds the rate of inflation, so you don’t lose your spending power over the long-term. But this may mean that if you have adequate (enough) resources for your needs, you likely don’t need to have more than 50% (and maybe even less than that) invested in stocks.

Some risks are worth taking. Sometimes you need to take long-term, rational financial risks, especially if you need to accumulate and grow your financial resources over a long time period.

However, some risks are not worth taking, or risks should be reduced. Prudent investors should not take on more risk than they have the ability, willingness or need to take.

The important question to ask yourself, and discuss with your financial advisor, is where are you in this financial game? What inning are you in? Are you winning, losing or still have a long way to play? How much risk do you really need to take?

If you have already won the financial game, are you only taking the financial risks which need to be taken, and not excess risk?

We would be pleased to discuss this important topic with you, or with others close to you, who could benefit from such a discussion or portfolio review. 

Talk with us.

This blog post was inspired by “Enough,” an essay in Appendix E of the book Reducing the Risks of Black Swans, by Larry Swedroe and Kevin Grogan, 2018 Edition.

A Milestone and reflections

Blog post #400

Numbers can represent milestones. Significant events. Progress. Moving forward. Growth, age and experience.

This is the 400th blog post we have written as a firm. 

What began as irregular blog posts in 2009 became a weekly commitment 5 years ago, in June, 2014. Since then, writing weekly has been a firm-wide effort, which involves coming up with an idea, writing, research and editing, compliance reviews and the final processing so the blog post is emailed to you for Friday am reading and adding to our firm’s website.

For me, as the founder of WWM, and primary author of nearly all of these blog posts, it represents a true source of pride and commitment to our clients. It represents the dedication and discipline to write, research and communicate to you, our clients and friends across the country, about relevant topics on a timely, regular basis.

There are very few independent financial advisors that have made this type of commitment to their clients to produce their own, original content on a weekly basis. We hope you find this valuable and helps you to be a better and more successful investor.

As this can be thought of as a milestone blog post, I wanted to share some bigger picture thoughts. Lessons. Key advice. Reflections since founding this firm in 2003.

We truly value the client relationships that we have developed. We take very seriously the trust that each client and their family places in us. We are confident that putting our clients interest first and using a transparent business model are vital to our past and future. That we own the same types of investments as our clients should give you even greater confidence that we strive to always act and be on the same side of the table as you, our clients.

During informal conversations, I have sometimes reflected that clients come to us for investment advice, but we can (and do) provide you with so much more. We help to determine a safe and reasonable annual withdrawal rate during the retirement phase of your life. We assist with college funding, retirement planning and analysis, aging, life transitions, estate planning and charitable giving. It brings us great satisfaction when clients request our input and advice on important decisions and transitions in their lives.

One of the core elements of our success was the adoption of an investment philosophy that we have been able to stick with, through all kinds of market ups and downs, as well as dramatic changes in the economy and companies, over the past 16 years. We are able to communicate our investment philosophy to clients, so they can understand it, adhere to it and appreciate that it is rationale and not guess work. More importantly, we continue to be confident that our core investment principles are valid and should remain so for the future.  Please read our blog, “A Philosophy You Can Stick With”, for further reading on why having an investment philosophy that we believe in allows us to be more disciplined and help our clients adhere to their financial plan.

Structuring a broadly diversified, global portfolio means that during some time periods we will outperform certain widely cited indexes, and at other times we will underperform these indexes. We structure and tilt our portfolios for the long term, towards asset classes that we believe will provide you with the best chance of long-term investment success, such as small and value, with significant International exposure. Sometimes value will underperform growth, or large companies will do better than small companies. We realize and accept this and explain this to you when we begin our relationship. We discuss and write about this often. We feel that providing you with guidance and discipline should help you to reach your financial goals.

One of our core principles since day one has been globally diversified stock portfolios, constructed with low-cost asset class mutual funds. There have been times, such as in recent years, that investing primarily in the US has been more successful than having a significant International allocation. As we base much of our investment advice and guidance on academic data, and not predictions, we remain confident that over the long term, our belief and adherence to being globally diversified will be beneficial.

While we listen to and read extensively from others we respect and trust, we make our own firm policy decisions after careful evaluation and analysis.

One of the few major portfolio changes we have made relates to commodity holdings. Many years ago, prior to 2008-09, academic data showed that adding commodities to a diversified portfolio would provide even more diversification benefits, as a hedge against inflation. The thought was that a commodity investment, with a significant component of oil related holdings, would provide good returns, particularly when inflation rose. As a firm, we later made the decision to drop most of these commodity allocations from client portfolios, as we perceived that the inflation hedge may not exist as often in the future because of the huge structural changes in the oil industry, mostly due to the growth of the US fracking industry. This has turned out to be a good strategic decision.

As interest rates dropped in the past decade, we made the decision to invest in high quality corporate bonds for certain clients who hold large fixed income investments. Some in our industry feel that high quality corporate bonds are not worth the additional default risk. We make the decision when we purchase new fixed income investments for clients, if the high-quality corporate bond interest rate premium is worthwhile over CDs and government securities, that this is a beneficial risk-reward trade-off. We remain confident that this has been very beneficial for our clients.

Another area that we differ from many advisory firms, both small and large, is our avoidance of many types of alternatives investments (such as alternative lending, reinsurance and hedge fund like investments). We believe that the investments we own and recommend to you should be as liquid as possible, have low fees, and are understandable and transparent. We have evaluated many such alternatives, and we remain very comfortable that our policy in this area has been to your best interest.

We wish that we had a clear crystal ball for the future. Unfortunately, we do not.

What we do offer to you is our goal of providing excellent financial advice, dedication to client service, the continued value of being lifelong learners in many areas of financial and investment matters, the intent to listen to your questions and concerns, and the commitment to invest in people and technology to provide the level of service and advice that you deserve.

We plan to remain disciplined and stick with our commitment to communicate with our clients regularly, via this blog, phone calls and meetings with you.

Thank you for reading.

And thank you for being a loyal client!

In Your Best Interest

Blog post #398

When you buy something, you want to know what you are buying. Or you should know what you are getting.

When you want to buy some packaged ice cream, you make a series of decisions.

  • You may decide you want to go for taste, not low calories.
  • So you purchase some Haagen-Dazs, Ben & Jerry’s, or your favorite local brand of ice cream. You may have had them in the past and know they will satisfy your craving for ice cream.
  • You can decide how much you want to eat. The package provides you with the calorie and fat content, so even though you didn’t buy the “low-fat” product, you can easily see the information and choose how much you want to eat in each serving.
  • The key is that the packaging provides you with information that is transparent. You can read the label and make an educated decision.

What does this have to do with investing and your financial future? A lot.

In most important decisions or situations you face in your life, you hope that the people or advisors you work with will always have your best interest in mind.

When you go to a surgeon, you hope the surgeon will do his or her best. You hope the surgeon’s only objective that day is for a successful surgery. You hope the surgeon is using the newest and best tools, techniques and medications. You hope the surgeon is not choosing to use 2nd class technology or equipment because she is being compensated or getting other benefits from a medical supplier.

When you retain a financial advisor, you should want them to provide you with advice, guidance and recommendations that are solely in your best interest.

However, the financial industry is not set up this way.

Our firm, as Registered Investment Advisors (RIAs), are legally bound to make decisions that are in our clients’ best interest. Isn’t that what you would want and expect?Don’t you want an advisor that is going to be transparent about their fees and costs, and clearly explain the internal fees of the investments that they recommend? We would want this….and we are transparent about all these matters.

However, brokers at the major brokerage firms and banks don’t operate under these same very high standards. Now, they operate under a suitability standard, which means that an investment or product can be recommended to you, even if there are better or less expensive choices, as long as they are “suitable” for you.

Under current standards, a broker could be making decisions on your behalf, but influenced by compensation structures that impact their decision process. They are supposed to disclose these conflicts and costs, but in reality, these disclosures are provided to their clients after the investments have been purchased.  Further, this  information is buried in long and complicated documents like prospectuses, which few people ever read, or can understand.

Is this really what you want?

Do you want an advisory firm that will always strive to recommend what they feel is in your best interest? Or, do you want a broker which makes decisions on your behalf that may not be “best” for you, but would be “good” for you…..but better for them, than another investment choices?

We bring this to your attention because the SEC last week approved new regulations for the investment industry that will be effective by June 30, 2020, but the new rules will continue to allow for two somewhat different standards.

The new rules will feature “Regulation Best Interest,” which will raise the bar for the brokerage industry, but it will still be lower and less transparent than the standard for a firm such as WWM.

WWM will continue to have a higher standard of fiduciary conduct to act in your best interest, now, and after these new rules become effective next year.

WWM is very transparent about how we are compensated. Our only compensation is from fees paid by our clients, based on the assets we manage for you. If your assets increase, we both benefit. If your assets decrease, our revenue goes down. We are on the same side of the table as our clients. We are not paid by any mutual fund, investment provider or custodian.

However, now and under the new rules, brokers can be compensated for total products sold and rewarded for asset accumulation. Current conflicts, such as contests for the sale of a specific product will be allowed to continue for another year. Brokers will be permitted to continue offering proprietary products and use compensation to incentivize sales.

If you have accounts only with WWM, you do not need to be concerned about such practices.

If you have assets at major brokerage firms, banks, insurance companies or other financial institutions that are not RIAs, you should be aware of these matters. You should ask questions, or we can help you to review your accounts and help you to understand what you are really being charged.

We are not saying brokers are bad, but the manner of compensation and conflicts of interest which can and do exist may not be in your best interest.

You should be fully informed with transparent information.

When you buy food, you can read the label. You can then make an informed decision.

As it is hard to read a prospectus, maybe you are better off with a financial advisor like WWM, that is clearly working only in your best interest.

Talk to us.

Source:

“What’s in the final SEC advice rules?” Investment News, by Mark Schoeff Jr. and Jeff Benjamin, Pages 10-11, 6/10/2019

Is the a better way?

Blog post #396

How do you make key financial decisions?

Are you up to date on all the issues you need to know?

The world keeps changing at a seemingly faster pace.

Decision making, especially in regards to financial matters, can be complex to begin with. Then factor in the rapid pace of change and it is clear that using a financial advisor, and sometimes a team of advisors, should help you make better and more informed decisions.

Let’s consider some of the financial issues that you may have to deal with during your life and how they have changed over the years.

Saving for Retirement: Decades ago, most workers had pension plans, which provided income for retirement. Now, this type of plan is almost extinct within corporate America, except for some government employees and teachers.

Today, most people are primarily responsible for their own retirement planning. You can save through 401(k) and 403(b) plans, for non-profit organizations, as well as IRAs, Roth IRAs, and Roth 401(k)s. These plans come with many choices. You must decide how much you should save, to fund your retirement. You should consider whether your employer provides a match and whether your contribution maximizes this match.

You need to decide how to invest this money, as your employer does not provide investment advice. Some plans come with many choices, dozens or more than a hundred is not uncommon. Do you coordinate your retirement savings allocation with your other investments? Do you realize that certain asset classes would be best to invest in a tax-deferred account? Do you consider the investment costs of the retirement plan investment choices and how they compare with your other investment choices?

Consulting with us as your financial advisor about how best to save and plan for retirement could be quite valuable, providing you with clarity and useful information.

Saving for college: A few decades ago, when my children were young, we saved money for their college education in what was known as UGMA accounts (Uniform Gift to Minor Accounts). These accounts are subject to Federal and possibly state kiddie taxes, which have become more burdensome in recent years.

Today, most states offer tax-deferred college savings plans called “529 plans.” Using a 529 Plan is more advantageous, as under current tax laws the UGMA accounts would likely incur taxes, whereas a 529 plan may avoid all income taxes.

However, you still must decide which plan to use, and how to invest the money. There are major differences between plans and just using an age-based allocation may not be the best strategy from birth until your child reaches college.

Consulting with us as your financial advisor about college savings strategies could be quite valuable, providing you with clarity and useful information.

 

Other examples of financial issues and topics which have changed dramatically over the past years are….

• Mortgages and home equity loans
• Life insurance
• Long term care insurance
• Estate planning and estate tax laws
• Tax laws, which are constantly changing
• Charitable giving
• Social security distribution planning
• Retirement plan distribution planning

Consulting with us as your financial advisor about these topics could be quite valuable, providing you with clarity and useful information.

Investing: It is obvious that the economy and the investment world is always changing. The rate of change is rapid. It is hard to predict which companies, and therefore their stocks, will succeed or not.

How can you determine which investments to choose? Which investments have the best chance to help meet your short and long term goals? How should you react to news, market predictions and swings in the stock market? How much of your money should be invested in stocks versus safer investments, such as fixed income? How do you decide how much of your money should be invested in the US and how much overseas? How much risk do you need to take? And what are the tax ramifications of all these investment decisions?

Working with us as your financial advisor for your investments can be quite valuable, provide you with clarity and a greater chance of long term investment success.

We feel there is a better way….which is to work closely with a financial advisor, such as our firm, on all the various financial decisions you face during your lifetime. By working with us, these matters can be discussed, analyzed and coordinated in a rational and effective manner.

We look forward to helping you, and others you know, make decisions like these.

Different choices, same end goal

Blog post #394

What do you do to be healthy? 

Have you tried different diets?

Do you take vitamins or supplements?

Have you tried different workouts?

Do you use a coach, trainer, fitness tracker or attend a regular class? 

Have any of those led to greater success?

To stay healthy, there are so many different options and choices we can and need to make. There is not a “one size fits all” fitness category. As with investment choices, which can be overwhelming, not all fitness levels and activities are appropriate for each person. Every WWM firm member has their own way that we choose to exercise to maintain our idea of a healthy lifestyle, such as walking, intense exercise classes, running, lifting weights, yoga, play a sport and biking, to name a few.

Just like our health, there are many choices or decisions for your financial road map to retirement and beyond. You know or you may have an idea or a vision of when and what you want your retirement lifestyle to look like. To get there it takes planning and making many decisions. This is where a financial advisor, just like a fitness trainer or nutritionist, can be helpful. 

If you have a fitness or eating routine in place, sometimes you go off course. You stop exercising. You add a few pounds. Even though it is easy to “not get back on the bike,” we all know it is in our best interest to resume with our fitness routine or eating best practices, to stay healthy. It is the same with investing, as even if there is volatility in the stock market, it is best to just continue with your long-term investment plan. 

Similarly, like investing, real life sometimes gets in the way. Even though you have a plan, there can be small or large bumps in that plan. Unplanned job changes. Illness. Unexpected expenses. Stock market declines.

It’s our job as financial advisors to help you navigate through real world circumstances and to help you reach your individual and family retirement goals, which are different for every person. We want to listen, learn and help you develop an investment strategy to help you reach your goals. 

When you become a client, we put together an Investment Policy Statement (IPS) that allocates your current assets, while considering your expected future savings and retirement goals. It is our goal to meet with you on a regular basis to make sure your goals are in line with the Investment Policy Statement put in place when you first became a client. 

If your plans change, or other outside factors change, we review and possibly revise your plan by amending your Investment Policy Statement, to make sure your asset allocation is in line with your goals. These adjustments could be due to changes in your goals, where you want to live or when you want to retire. Changes could also be for financial reasons, if you need to take more risk or less risk, based on how the financial markets have performed over time and your projected life expectancy.

Your Investment Strategy should be as important as your health. We all want to be the best versions of ourselves. 

If you have concerns about your health, you may visit your preferred health care professional to get help. If you have financial concerns or need guidance regarding your investments and financial planning topics, why not reach out to your advisor.

If this makes sense to you, please contact us to schedule a conversation.  We want to learn more about you and your goals, and how we can help you reach them.

A Key to Financial Success

Blog post #393

It can seem easy to remain invested in stocks when they are increasing.

You likely don’t feel worried or stressed when your assets are increasing, when you are making money. 

Your real test occurs when financial markets are down…when you are losing money. 

As your advisor, some key information can be helpful to your financial success. 

We want to help you to have reasonable expectations of the stock market. 

If you have reasonable expectations of the stock market, in advance, both positive and negative, this should help you to be a better long term investor. 

The US stock market, as defined by the S&P 500 Index**, has delivered an average annual return of around 10% since 1926. 

While we recommend investing in a globally diversified stock portfolio, using the S&P 500 Index as a base for discussing the stock market in general is appropriate for purposes of this post, even though the Index consists of only US based large companies. 

How often has the S&P 500 Index’s annual returns actually delivered returns near 10%? Actually, quite infrequently. 

The results are surprising! In Exhibit 1 below, there is a shaded band which represents the 10% historical average, plus or minus 2%. Thus, the band represents annual returns between 8-12%. As Exhibit 1 below shows, the S&P 500 Index has had returns of between 8-12% in only 6 of the past 93 calendar years, between 1926-2018. 

In most years, the Index’s return was outside of the 8-12% range, often above or below by a wide margin, with no clear pattern or predictability. 

The Index was down in 24 of the 93 years. That is 26% of the years. That means that 74% of the years, or almost 3 of every 4 years, the Index has been positive. That should help you to remain invested when the down years do occur. 

This emphasizes the point that while investing in stocks comes with significant volatility, the downward fluctuations are temporary. You need to have the emotional ability to stick with your asset allocation to stocks during the down years, to reap the long term positive rewards which stocks have provided in the past and are expected to in the future. 

You can potentially increase your chances of having a positive financial outcome by maintaining a long term focus. As Exhibit 2 documents, the longer you invest, your odds of success improve. While positive performance is not guaranteed, the past evidence is very strong. 



This data is for 12 month rolling time periods, not calendar years, between 1926-2018. For example, the first period starts in January, 1926. The second period starts in February, 1926. 

As the chart shows…
* 95% of the 10 year rolling periods were positive
* 88% of the 5 year rolling periods were positive and
* 75% of the one year rolling periods were positive. 

What can help you endure the ups and downs of the stock market?

There are no easy or simple answers. We feel that working with an advisor that provides you with this type of data, and explanations, can be a valuable starting point. 

If you are aware of the range of potential outcomes of the stock market, it should help you to remain disciplined. In the long term, this can increase your odds of a successful financial experience. 

We want to help you to be prepared for stock market volatility, as no one knows when that will occur. 

We want to help you to react rationally, and not emotionally, to the stock market, so that you can focus on the long term and strive to reach your long term financial goals. 

We strive to provide you with clarity and guidance, so you can have a greater sense of financial security, comfort and success

If you are not a client, we would be pleased to talk with you.  Call or email us.

If you are a client and have friends or relatives that could benefit from this type of guidance which you have received, please let them know about our firm.  We would be pleased to help them as well.  You can start the conversation.

For more reading on this topic, see our prior blog post, “When Average is Not Average.”

Source: The Uncommon Average, White Paper published by Dimensional Fund Advisors, May 2019 

**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 over time. You should also realize that the companies within the S & P 500 have changed frequently over this period, as companies grow, fail, merge and get acquired.


Make Things Better

Blog post #390

Better implies that what you have right now can be improved. It is an assertion that requires confidence to say it and the optimism that it’s possible. 

Make implies that it’s up to you (and us). Someone needs to make it better. Better requires change, and change can be scary for some people. 

These are thoughts from a recent blog post, Make Things Better, by Seth Godin. Seth writes a daily blog, which I highly recommend, and is a prolific author.

Godin’s blog post about “make things better” is meaningful to us for what it represents about the values, goals and service that WWM provides to our clients.

We started WWM in 2003 to make things better. We entered the financial advisory business because we knew there were better ways to provide comprehensive financial and investment advice.

Investing can be complex. You may have had bad experiences in the past. You may have had advisors or brokers you thought were doing a good job, but something went wrong. You may not understand how to choose your 401(k) plan investments.

The financial world can be daunting and ever changing. You may not know what stocks, mutual funds or other investments are best for you. Tax and estate laws change. Retirement planning requires understanding and coordinating many types of data. 

You may not know the actual costs of your investments and whether you are paying hidden fees. You may not know how your money is really invested, especially if you have accounts at multiple places or brokers. 

Fees and costs are important and a critical component of investment success. We are transparent about our fees and the costs of the investments that we recommend to clients. When we meet with prospects, our fees and the total costs are generally much lower than the prospects current situation. We are not compensated by the investments we recommend, which is very different than traditional brokerage firm models. 

We believe your investments should be coordinated, so you have a real financial plan, which we call an “Investment Policy Statement.” We will advise you on your 401(k) plan and the many retirement decisions and issues you face. We can help you plan for Social Security and develop retirement projections. By having advisors develop a coordinated plan for you, this should reduce your financial anxiety and stress.

Working with a firm with a long-term investment philosophy which we feel is understandable, disciplined and rationale can help to provide you with confidence and security, regardless of how the financial markets are doing. We explain things in English. We communicate with you regularly, such as this blog, in a manner that helps you understand what is going on in the financial world. We know that clarity and understanding are important. 

We are very pro-active in our efforts to reduce and minimize the taxes related to your investments. We utilize tax-managed asset class mutual funds, which strive to minimize the taxes distributed from the fund, without hindering the performance. This type of fund is still relatively rare in the financial world. When appropriate, we place trades to recognize tax losses or avoid taxable fund distributions. We did a lot of these for clients last year, as applicable. 

For those clients who are now working with us, in Seth Godin’s terms, these people reviewed their situation at the time they first talked with us and thought working with us could make their financial lives better. They took the initiative to change, even if the change was difficult to do. 

We work hard at getting better. We take our role in providing you and your family with financial advice and guidance very seriously. 

If you are a current client, we hope that we have made things better for you. That is certainly one of our goals. If you have friends or relatives that could benefit from the advice, clarity and guidance we provide, please let them know about our firm. Forward these blog posts or share with them. 

If you are not yet a client but a reader of these posts and think you may be ready to consider a “change for the better,” please call or email us to schedule an appointment. 

Jeopardy phenom continues at record pace

As a follow up to last week’s blog post, James Holzhauer has continued with his incredible pace of Jeopardy winnings, as he has won $697,787 in 10 straight wins. Holzhauer now has the 4 highest winning games, including 3 games of more than $100,000 each. He is averaging almost $70,000 per night, while 74 game winner Ken Jennings averaged below $34,000 per game.

His speed, knowledge and confidence in betting are remarkable. My big question is when he eventually loses, will he be beat by a smarter and faster contestant, or will the cause be his own overconfidence? 

Spring Investment Fundamentals

Blog post #388

The 2019 baseball season has just begun. 

This means that spring training has just concluded, which is the time when experienced players and rookies alike focus on the fundamentals of the game. Even though these players are the very best in their sport, they have just spent many weeks practicing baseball basics under the direction of their coaches.

The players went through repeated drills and practiced skills they have been doing ever since they were youngsters first playing baseball. Repetition. Reinforcement. Remembering the basics!

In that spirit, let’s review some investment fundamentals. 

Over the very long term, returns from stocks in the US and Internationally have far outperformed the returns of investment grade bonds, by a significant margin. 

It thus makes sense to own stocks, and not bonds, if you want your investment portfolio to grow over the long term.

The long term return of the S&P 500, representing large US based companies, is around 10% annually. We believe in a well diversified global portfolio, which includes small and large companies, as well as value companies. This type of globally diversified portfolio has future expected returns that should exceed that of the S&P 500 alone, over the long term.

To get the reward of the long term returns of stocks, you must endure the volatility that comes with owning stocks. This is a temporary risk, as diversified stock markets have climbed higher over time.

  • For example, the S&P 500, an index of 500 US-based companies, of which the companies in the index change over time, has increased over 25 times since the beginning of 1980.
  • The S&P 500 has increased from 108 on January 1, 1980 to greater than 2,800 in April, 2019.

The temporary risk is the challenge. The hard part for most investors is dealing with the volatility, like when markets drop by 20% or more. This has happened and will continue to occur, about once every 5 years since WW II. 

Helping you to deal with this volatility is one of the key benefits we can provide to you.

As stock markets cannot be consistently or accurately forecasted, the only way to benefit from the returns of the stock market is to remain invested in stocks, in accordance with the stock allocation that is determined to be appropriate for your specific situation. You can’t time stock markets. It doesn’t work. 

During the baseball season, a manager and coaches will continually remind their players of the key fundamentals, to help them succeed.

We remind you of these concepts to help you reach your financial goals. 

  • Risk and return are related.
  • The better your ability to emotionally handle the temporary drops of the stock market, the greater your chances are to reap the long term rewards that stocks can provide.
  • We will be here to guide and advise you.

Talk to us.


Handling recession and interest rate fears

Blog post #387

The economy and investment worries are always changing. 

Last year, many feared the impact of trade wars and rising interest rates to their portfolio. 

Most investors had portfolios that declined in 2018 but have seen a strong rebound so far in 2019.

Recently, there has been growing concern that due to slowing economic growth, stock portfolios may be at risk if there is a recession. If the US or global economies continues to slow, that could worsen and turn into a recession, which means at least two quarters of decline in the economy. 

Interest rates have dropped recently, so that some longer-term rates are now paying less than some short-term interest rates. For example, the three-month Treasury bill is yielding 2.439%, while the 10-year Treasury note is yielding 2.374% as of Wednesday afternoon. This is called an “inversion” of part of the bond yield curve. Some forecasters feel this type of “inversion” is an early warning sign of a future recession.

Should you be worried about this?

If you are not working with an experienced team of financial advisors, you could be worried. 

If you do not get clear and timely information, you could be worried. 

Why we don’t think you should be worried.

If you get advice and guidance from a financial advisor such as WWM, you have a long-term investment plan in place which is based on sound philosophies, so we don’t think you should be worried. We plan with you for these types of occurrences, even though we cannot predict when they will occur.

Recessions are very hard to predict. And when recessions do occur, they usually do not last that long, ranging from 6 months to less than two years. Since the Great Depression in 1929-1933, which lasted 3 years and 7 months, the longest recession was 18 months, from December 2007- June, 2009.*

And there is not necessarily a direct correlation between the timing of recessions and the impact on your investments. The stock market can decline before a recession starts and rise before a recession ends. We do not feel that what happens in the next 3-6-18 months, to the economy or your investments, should impact your ability to reach your long-term financial goals, with sound financial planning and investment advice. 

A recession does not mean that the stock market will necessarily incur the huge declines that were experienced in 2007-2009. That is always a possibility, as major declines generally occur at least once every 5 years, but again, these types of downturns cannot be reliably and accurately predicted in advance. 

Thus, fears about a potential recession should not translate into a change in your long-term investment plan of action. In a CNBC interview on Thursday, March 28th, Warren Buffett was asked about a potential recession and the impact of that on his investment strategy. He reiterated his belief, which we agree with, that you can’t predict when events like recessions will occur and it would not change his long-term desire to buy and hold stocks.

If you work with WWM, you have an investment plan that is developed for your personal situation. We view these plans as long term, to cover your financial goals and objectives for many years. You would have a globally diversified asset allocation mix (the amount of stocks and fixed income investments) that is appropriate for your goals and risk tolerance. 

If you work with WWM and you are in retirement, your investment plan is designed for decades, to support your desired standard of living. 

If you are saving for college or retirement, your plan is intended to suit you for many years or decades, during both good and bad stock market periods. 

We understand that at times you may have concerns or worries. If you are still worried after reading this, that is what we are here for. Call us and let’s discuss it. 

Working with WWM, we strive to guide you through the always changing economy and financial markets with a solid investment philosophy.  We strive to provide you with advice, re-assurance and clarity. 

We don’t want you to panic and sell because of fear. That could be detrimental to your financial future. Selling because of fears and downturns could reduce, not increase, your long-term goal of financial success. 

We want you to understand what is happening in the financial world, so that you will have the fortitude to adhere to your long-term financial plan. We feel that sticking to a long-term plan that we develop for you is much more likely to lead you to financial comfort and success. 

If you are not working with WWM and not receiving our financial advice, we encourage you to contact us. See the difference that we can make in your financial life. 

Source:

* “List of recessions in the United States“, Wikipedia


Major Financial Plot Twist

Blog post #386

In December and the fall of 2018, the Federal Reserve played the role of villain.

They had raised short term interest raises for five consecutive quarters and were projecting more increases for 2019 and 2020.

As a result of these increases, the Federal Reserve appeared to be Grinch-like just prior to last Christmas, which contributed to significant stock market losses in 2018. See our blog post, Is the Fed acting like Grinch?, from December, 2018. 

But in January, the Federal Reserve began changing the plot in this economic story. They went from villain to hero, at least as far as global stock markets and investors are concerned. 

Since their late December meeting, Federal Reserve officials have signaled in speeches and meetings that further rate increases may not be needed in the near term. 

This change in the Fed’s stance, though caused by their concern that US and global economies are slowing in growth, are a large factor in the strong performance of major US and global stock indices so far in 2019.

To reap the long-term benefits of investing in a globally diversified stock market portfolio requires patience and discipline. If you were patient and disciplined in late 2018, and didn’t overreact to the 2018 stock market declines, you have likely been rewarded in 2019.

The Federal Reserve announced no new short-term interest rate changes this week and projects no increases for the remainder of 2019, after their recent two day meeting. The average member now expects a single .25% increase next year, in 2020, and no increases for 2021. 

This is a major change from their position in December, 2018, when Board members forecasted two .25% rate increases in 2019, which was a reduction from their projections earlier in 2018 for three 2019 increases.

The Fed reaffirmed its stance that it “will be patient” in determining future interest rate changes, based on observed economic data (past economic activity) and expected future conditions.

It is clear once again that economists are not able to accurately predict the future.The Fed is supposed to have some of the top economic experts in the country, yet their “dot plot” forecasts of future interest rate expectations have consistently been inaccurate over past years. 

How will the economy act in the future? Will the Fed play the role of villain or hero?

We know that the future story will likely not play out as currently forecasted. There will be events and changes that can’t be anticipated. No one really knows the economic future, how the trade issues will be resolved or the pace of growth. It is likely that the Fed’s current dot plot forecasts of future short term interest rate changes will be different than they predicted this week. We don’t know when or if they will raise or even reduce rates, or the pace of the actual future changes…from what they predict now. 

This reaffirms our philosophy of not investing based on interest rate predictions. This is why we believe in using laddered fixed income holdings, spread across various maturities, and not betting on interest rate moves. This is why we don’t make stock market investments and recommendations based on predictions. 

Fed Chair Jerome Powell still expects the US economy to “grow at a solid pace” in 2019, but at a slower pace than in 2018. This is causing longer term interest rates, such as the 10 year bond, to decline even further than expected. The rate was over 3.24% in early November, 2.77% in late December, 2018 and was 2.54% Wednesday afternoon, which was the lowest level since January, 2018.

We always stress that investors need to be focused on the long-term. Commenting about these Federal Reserve changes may appear that 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.

You want investment and financial advice. You want reassurance and confidence, with a future that is uncertain.

We can provide you with clarity, perspective and solid answers. 

We can guide you through financial complexity and work toward increasing your changes of meeting your financial and retirement goals. 

Talk to us.