Importance of Staying in the Game

Blog post #419

Markets go up. Markets go down.

It can sometimes be difficult to stay invested, especially during down periods.

As the chart below clearly shows, staying invested and not trying to time the stock market is one of the most valuable pieces of financial advice that we can provide to you.

The data below is based on the S&P 500, which is an index of very large US based companies. The companies in this index are always changing, as companies get bought, merge, shrink and grow.

From 1970 through August 31, 2019, $1,000 invested in the S&P 500 grew to $138,908.

However, note the significant change in that outcome if you miss some of the top performing days.

If you were out of the market on the top 5 performing days of the S&P, your return would have declined by almost $49,000, from $138,900 to $90,170.

If you missed the best 25 days, the outcome dropped from $138,900 to less than $33,000, an incredible loss of over $106,000, from only 25 days over almost 50 years!

There are no proven ways to time the market. So market history and academic data says the best course of action is to adhere to your long term financial plan, which we develop with you, and stick with your stock allocation through up and down financial markets.

Sticking with your financial plan, and investing in stocks, will provide you with the best opportunity to reap the rewards that stocks can offer over the long term.

While we provide this data on large US based companies as an illustrative example to guide you not to try to jump in and out of the market, it is important to emphasize that we strongly recommend a globally diversified stock portfolio, with many asset classes, both in the US and Internationally, not just using the S&P 500.

While the S&P 500 has outperformed many other stock asset classes recently, this has not always been the case. There have been other long periods, such as most of the period 2001-2010, when other asset classes, such as US small value and most international and emerging markets far outperformed the US Large asset class, as represented by the S&P 500.

Do not try to time stock markets. That is not a winning game.

Over the long term, do not invest only in the S&P 500. That is not a winning game.

Over the long term, to have the best chance to reach your financial goals, you should be globally diversified across many asset classes, tailored to your individual and family’s need, ability and willingness to take risk, as well as your age and time perspective.

We look forward to talking with you to develop, or review, your portfolio.

Source:

“What Happens When You Fail at Market Timing”, Dimensional Fund Advisors,10/29/2019

Financial Markets Don’t Come with Traffic Signals

Blog post #414

It is unfortunate, but true.  There are not financial traffic lights that signal “green,” it’s all clear now…you can proceed to enter the stock market with no risk.

There are no reliable financial traffic lights that signal “red” and tell you accurately and repeatedly when you should be exiting the stock market.

There are not even “yellow” caution traffic lights, that can accurately and consistently warn you of impending downturns in the stock market.

So, how can you handle the volatility that comes with investing in stocks?

We discuss this topic with you, as clients.  As your advisor and guide, we want you to be prepared for market downturns, as they can occur at any time.  While we don’t have traffic lights, we can help you deal with the volatility you experience on your investment journey.

You should have a written financial plan. It does not need to be fancy. Working with us, we will prepare a financial plan for you and help you adhere to the plan, through the ups and downs of the financial markets. Your written financial plan should provide an asset allocation that makes sense for you and your family, for whatever short and long term financial goals you have. We develop this plan for you, and decide how much to allocate to fixed income (cash, bonds, CDs) and how much to invest in stocks, and where, such as US, international, emerging markets and real estate.

So what about now? What is going on? What should you do?

Part of our philosophy is recognizing that we do not have a crystal ball and that we cannot predict the future. That being said, we are realistic and optimistic, for the long term. History teaches us that if you are a patient, globally diversified investor, you will be rewarded. Companies, people and countries innovate and are resilient.

As Warren Buffett has stated, “Mr. Market” is usually too optimistic or too pessimistic. Some type of uncertainty always exists. That will not change. We focus on what we can control. We plan and focus for the long term.

Timing the market does not work. We wish we had a crystal ball. We wish we had the perfect financial traffic light. But that is not reality.

Instead, we have a solid investment philosophy (which is not based on predictions and guess work) and financial planning skills that can provide you, our clients, with a sense of comfort and financial security to help you reach and maintain your financial and lifestyle goals.

Talk to us.

High yield dividend stocks: good or bad?

Blog post #411

With interest rates so low, clients and others have asked us about buying high yielding dividend stocks.

Their logic goes….wouldn’t it be a good idea to buy a stock that has a dividend yield of 4-5%, since this pays more than the interest rate on a CD? They could earn more income by owning the stock and receiving the dividend payments.

This sounds like a good idea, but, it does not always work out so well. The primary risk in this strategy is that the price of the stock could drop, which negates some or all of the higher dividend yield benefit. The other risk is that the company may not be able to continue paying the dividend at the same rate in the future…that the company would be forced to cut their dividend.

Currently, the companies in the S&P 500 Index, the largest companies based in the US, pay a dividend yield of around 1.85%. For example, if a company pays a dividend of $2.00 per share and has a stock price of $100, its dividend yield would be 2%. This would be pretty typical of a large US company in today’s market. If a stock is paying dividend yield that is far higher than 2%, say 4% or more, we would consider that to be a high yielding dividend stock.

Some examples of currently high yielding dividend stocks are: IBM, 4.47%; ATT, 5.27%; ExxonMobil, 4.83%; Verizon, 4.12%; Ford, 6.37%; Wells Fargo, 4.22%; Macy’s 8.83%.**

Examples of other companies with lower dividend yields would be: Apple, 1.42%; Wal-Mart, 1.83%; Microsoft 1.34%; and Costco, .88%.**

We are focused on your total return when we manage your money. This means we are focused on what happens to your principal (the amount of money you have invested and what happens to that balance over time), as well as the income (interest and dividends) which are generated from that money.

If you are focused primarily on the dividend or interest yield, you are not focusing on the total return.

Stocks that have a very high dividend yield have a high yield for reasons which are usually not good. You should view high dividend yielding stocks with the following guideline: risk equals reward. If a stock has a very high dividend yield, it usually means there is extra risk involved. The higher the dividend yield, the more cautious you should be about the stock. Remember this!

ABC stock may have had a 2% yield and a $100 share price. But if the stock price drops significantly, say to $50 per share, and still pays $2 per share a year in dividends, ABC Company now has a 4% dividend yield ($2 dividend/$50 per share stock price). This stock just became a high paying dividend stock.

This scenario is the usual case, as other than utility companies and REITs (real estate investment trusts), most companies don’t strive to pay 4-6%, or more, as a dividend yield. They get into that position usually because their stock price has dropped. The company has run into problems. Strong competition. Falling earnings and revenue. Debt problems. And their future earning forecasts would typically be going down.

For companies like this, which pay a far higher dividend yield than the norm, you should also consider the potential that the dividend may not be sustainable in the future. One prime example of this is GE, which due to serious financial problems had to drastically cut their dividend from 96 cents per year in 2017 (which was a 4% dividend yield at the time in September, 2017) to 4 cents per share per year in late 2018. GE stock went from $50 per share on January 1, 2000 to range over the last six months of around $9-11 per share. GE’s dividend yield is now approximately .44%. This is a very low dividend yield, but it is not a positive sign, as the company cannot afford to pay out more in dividends, due to the major business issues it faces.

While high yielding dividend stocks can pay good income, their stock performance may not be as good over the longer term, especially when compared to other indices or benchmarks. This is why we emphasize focusing on total return (the growth of your overall invested money), and not only on the dividend yield.

To provide an illustration, we researched many large companies with currently high dividend yields and compared their stock performance over the past 10 years. As the chart below shows, the performance of these high dividend yielding stocks were dramatically less than the performance of a globally diversified stock portfolio, such as we recommend.

The chart below shows how 3 of these stocks, IBM, ExxonMobil and ATT, performed over the last 10 years (from September 14, 2009 – September 11,2019), as compared to a globally diversified asset class mutual fund, DFA Global Equity Portfolio,*** which is invested in 70% US stocks, 30% International and Emerging Market stocks, with exposure to small companies and real estate stocks, with significant exposure to value stocks.

We clearly recognize that this is an illustration of only three companies, so it is not intended to be considered as definitive financial research. There may be high yielding dividend stocks which outperformed various benchmarks over the past 10 years. The point we are making is that by owning a globally diversified portfolio of asset class funds, we strive to provide you with better overall returns, than by just focusing on stocks with greater dividend yields.

As we reviewed a number of companies in researching this blog post, we noted the same pattern over and over. Companies that have high dividend yields now, had poor stock performance over the past 5-10 years. We do not know how these stocks will perform in the future, but we would not recommend that you build a portfolio of a few of these stocks as the core, significant portion of your investment portfolio.

All stocks come with risk. Stocks with much higher than average dividend yields come with much greater risk to your principal, your investment capital. We don’t think that is a risk that is worthwhile for the core part of your investment portfolio.

We hope that this is helpful and informative to you and your family. Sometimes our role is to provide you with guidance, and other times it is to help prevent you from making financial mistakes.

If you are considering purchasing high yielding dividend stocks, maybe you should talk to us first.

 

** Dividend yields as of September 11,2019, per Yahoo Finance.

***DFA Global Equity is presented to be representative of WWM’s globally diversified investment portfolio. It is not a representation of any client’s specific portfolio and is presented only for illustrative purposes. The chart does not reflect WWM’s annual investment advisory fee, but that would not materially change the outcome which the chart shows. For more information on DFA Global Equity, please see Dimensional Investments, ticker symbol DGEIX.

 

Long Term v. Short Term

Blog post #409

When we provide investment advice and write in these blog posts, we recommend to focus on the long term, especially with regard to investments in the stock market.

A client recently asked me how that “long-term” perspective applies to him, as he is “older” and feels that his time horizon is not as long as he once perceived it.

This is a valid question, so I thought it would make sense to address it.

Let’s start with a basic premise, that if you invest in the stock market, including a globally diversified portfolio as we recommend, you must be prepared for a significant loss of your money over a relatively short period, which could be anywhere from months to a year or two. Stock markets can and do drop quickly and significantly. In order to reap the benefits and gains of stocks, you must be willing to endure the down periods.

In real terms, you could see a decline (loss) of 10-20-30-40% or even more, of whatever money you invest in the stock market, at any point in time. This has happened before and it will happen again.

This is where your time perspective and the reality of the stock market come together. We encourage you to view stock market losses as temporary, and not permanent losses. If you don’t sell at the bottom or during down periods, you should be able to recover from the temporary losses in the stock market, depending on your situation and your timeframe.

As you can see from the following chart, each major loss of greater than 20% of the S&P 500 since 1926 was fully recouped within a few years. For each period, for down and up markets, the chart shows the number of months and the percentage loss and gain over the respective time period. For example, the tech meltdown that started in 2000 resulted in a downturn of 45% in the S&P 500 and occurred over 25 months. Over the next 61 months, the S&P 500 gained 108%.

Please note that this chart is presented for illustrative purposes, to help you understand that stock market losses are temporary and not permanent. We recommend portfolios that are much more diversified than just the S&P 500 (which includes US based large companies only and the companies in the Index have changed significantly over time) so the performance of a portfolio that we recommend may have done better or worse during these specific time periods, but the concept would still be valid. Losses are temporary, not permanent, if you can be disciplined and patient.

The client who posed this question asked me how we factor his “shorter” time perspective into his planning.

When we determine the allocation of a portfolio – how much is invested in stocks v. how much is invested in fixed income (bonds, CDs and cash, which are considered safer and not as volatile as stocks), we focus on your need, ability and willingness to take risk.

And this is where the time perspective begins to take part in the planning and advice that we provide. This is very personal and may be different for each person. For someone such as this person, he may feel he does not have the willingness to take on as much risk, due to his or her age. But we also have to factor in the need for growth in the portfolio, which can really only come from the stock allocation. We also consider his ability to handle the risk, which is likely a factor of age, as well as each persons’ emotional ability to handle volatility. Thus, we would hope that we can recommend a portfolio that has an allocation to stocks that will enable each client and their family to be able to meet their lifetime financial goals and desired cash flow, as well as be at a level of stocks that they can handle emotionally.

Since any money invested in the stock market is subject to loss, we account for someone’s shorter time perspective by adjusting (reducing) the percentage of the portfolio that is invested in stocks.

As we said above, a key part of our philosophy is that stock market losses are temporary, not permanent. But you have to remain invested in stocks, in order for them to recover….and you can’t know how long the recovery will take, especially in the midst of a market crash, such as occurred in 2008-09, or even last fall and through December, 2018.

For most people, this type of analysis and planning is in respect to their retirement portfolio. In this case, your life expectancy is what should drive your time perspective. Based on Social Security life expectancy data, for which 2016 is the most recent published, someone at the respective ages in 2016 should live, on average, to the following ages:**

Male Female
60 Year Old 82 85
70 Year Old 84 87
80 Year Old 88
90

Also, keep in mind, that this means that half of the population is expected to live longer than the above figures and half will live less. These are the mid-points. Further, it is clear that for people who are better educated, wealthier, and presumably have better access to good health care, they would be expected to live longer than the average. However, as we all know, the only statistic that counts are yours, and the ones you love, not the averages.

But for planning purposes, unless you have a specific medical condition that you have shared with us, we would rely on this type of data. Thus, for someone who is around 60, we would view them as having at least a 20-30 year time perspective. For someone who is 70, we would want to plan for a 15-25 year time perspective.

This is really important. You may be in your mid-60s and not feel that you can think long-term as it relates to stocks. But we encourage you to think long term, as we view it. We have many clients who are well into their 80s and 90s. I’m sure that each of you know people like that. We need to plan so that your money can last for a very long time while you live in retirement.

There are other situations, such as college savings plans or certain employer incentive programs, which have specific timeframes or ending periods, where the money will or should be distributed. In these cases, we would plan very differently than for someone’s retirement funds, as these situations may really have only a 5 or 15 year ending point. In these cases, we would recommend that the closer one gets to the end of the time period, or closer to the college years, the money in this type of account should get much more conservative, reducing the stock allocation to 10-20% or even less, in the final year or two.

As your advisor and guide, we can help you deal with these varying, emotional and financial issues.

  • All aspects of investing and financial planning should include discussing your emotional ability to handle risk.
  • It should include evaluating what is the appropriate time frame for your investments. You may have differing bucket of assets with varying time perspectives.
  • We encourage you to think long term, especially in light of longer life expectancies. You may live into your 80s or 90s and we need to plan for that.
  • Based on this, if you have a 20-30 year life expectancy, you should have a long term time perspective to be able to recover from temporary stock market losses.

We hope this information is valuable and helpful to you.

If it is, please share this email with your friends and family members. We would be pleased to add others so they can receive these blog posts weekly, with their permission.

We hope you have a safe and good holiday weekend.

Source:

**”Life Expectancy Table,” https://www.ssa.gov/oact/STATS/table4c6.html, webpage as of 08/29/2019

 

Market update: August 2019

Blog post #408

The past 4 weeks have been full of financial news and events….
  • Stock markets have dropped and risen,
  • Interest rates have dropped significantly
  • Trade war tensions have continued to escalate
  • There is more talk of a potential future recession in the US.

Despite all this financial volatility, US large company stock market indexes are still within approximately 5% of their all-time highs.

If you are concerned about the news, these financial changes or market volatility, please contact us so we can talk. We can discuss these events with you and review how they may impact your financial goals, objectives and your portfolio.

Before we review some of the economic details, it is important to remember some investment principles that we believe are in your financial best interest:

  • You should focus on what you can control.
  • You should not panic or make reactive decisions. You should make financial changes and important decisions for the correct reasons, such as changes in your life or financial circumstances, not in reaction to short term events.
  • Not making major portfolio changes is a decision. Sometimes, inaction is actually a rational decision.

There has been more talk recently about recessions, either in the US or on a global basis. A recession is two quarters (6 months) where the economy declines, or fails to grow. A recession is a normal part of long-term economic cycles. There has not been a recession in the US in over ten years. 

We do not feel that the US is on the cusp of a recession right now. There could be one soon….or the next one could be years away. We know there will be another recession at some point in the future, we just do not know when. We know this just as we know that the stock market will reach new highs, but will also go down as well. We just can’t time when recessions will occur, just as it is extremely difficult to predict stock market tops and bottoms.

Based on actual, empirical economic data, the US is not in a recession today. Based on recent sales and earnings reports, it is clear that US consumer is still very strong. Retailers like Wal-Mart, Home Depot, Lowe’s and Target reported over the past 7 days that customers are spending more, not less. If we were in a recession, or heading that way, the reports would not have been anywhere as strong as they were.

The tariff and trade tensions between the US and China may be impacting US corporate spending and investment, as well as affecting the purchases of US products by companies based in other countries, but there is not clear evidence that a global recession is ongoing.

Normally, in a healthy economy, interest rates on bonds and other fixed income investments go up as their maturity’s lengthen. This is called a rising yield curve. For example….

  • a one year bond would pay 2%
  • a 5 year bond would pay 3%
  • a 10 year bond would pay 5%

After the Federal Reserve lowered short interest rates on July 31st, President Trump reheated the trade war with China. Since then, various economic moves have been made by central banks worldwide, as well as increasing purchases of US government bonds by foreigners, has resulted in very fast and significant drops in US interest rates.

The yield on the 10 year US Treasury Note dropped by almost 25%, from above 2% in late July, 2019 to around 1.55-1.60% in the past two weeks. In stark contrast, during late October, 2018, less than 9 months ago, the yield was above 3.2%.

As a result of these dramatic drops in interest rates over the past month, parts of the US government bond yield curve is inverted, meaning it is not steadily sloping upwards, parts are now sloping down.

As of Wednesday, August 21, 2019, the yield curve reflected:*

As a result of these interest rate movements, and the partial inversion of the yield curve, some feel that the bond market is signaling an oncoming recession. There is past evidence that an inversion of the yield curve has preceded all post-war recessions, but not all inversions signal imminent recessions.** And, sometimes these recessions took 18-24 months following the initial yield curve inversion to occur, so it is not like a flashing light that something will automatically occur in exactly 4 weeks. It is a blurry, potential signal, at best.

Global interest rates are very low and in many foreign countries interest rates are negative, in an effort to support their economies. This may be causing even more demand for US government bonds, which still pay positive interest yields. This increased demand for US government debt may be a significant factor in what is causing US interest rates to go even lower over the last month.

These may be some of the global causes of the inversion of the US yield curve. As interest rates are already so low and the yield curve so flat, the inversion may not necessarily be an imminent sign of an upcoming recession.

We do not think the US or the global economy is currently facing a serious economic event, such as what occurred around 2008-2009. However we cannot predict the future. We can just try to review the data, read and listen as much as we can, and try to provide you with guidance, clarity and explanations.

The other critical element that must be remembered is that economies and stock markets are not directly tied to each other. Both are hard to predict. Even if you could predict a recession’s beginning and ending, it would not necessarily make you a more successful long term investor.

You will be much better off focusing on your long-term goals, remaining disciplined and adhering to your financial plan (Investment Policy Statement), than trying to predict or worry about the next recession or trying to time the stock market.

Sources:

*“US Yield Curve,” WSJ.com, as of August 21, 2019 and as viewed on August 22, 2019.

**“Recession Fears Are Overblown,” Wall Street Journal, page A15, Andy Puzder and Jon Hartley, August 21, 2019 (Opinion page)

Should You Get Out or Stay for the Ride?

Blog post #391

As many US market indices are at or near all time highs, and International markets are also performing strongly, many are asking the opposite question. Have US markets reached new peaks? Will they go higher? 

On Monday, the Wall Street Journal had an article titled “As Stocks Climb, Some Investors Wonder When to Get Out.” The article started by asking that as stock indices approach new record highs, it “leaves investors with a difficult choice: Lock in this year’s startling gains or hang on for the ride?”*

As an investor (and client), this may seem like a reasonable question. What should you do and how should you react when markets set new records? Will markets go higher? Should you be selling now?

This is another time we can be valuable as your financial advisor and guide, to provide you with advice and clarity during key moments and to help you avoid what could be a critical financial mistake.

We encourage and help you to be rationally optimistic. We help you to be rational, and not emotional, as you deal with uncertainty, especially in the financial markets. These principles enable us to provide you with financial and investment advice that is timeless and can be effective, if you are disciplined and patient.

We remain rationally optimistic about the long term financial markets, both in the US and overseas. History and academic data teaches us that corporate earnings will continue to grow, which will lead to higher stock markets in the future, both in the US and Internationally. 

Despite the fears and declines at the end of 2018, far more corporations have reported solid earnings for the first quarter of 2019 (so far) than declines in their revenues or earnings. Good earnings reports and guidance for continued earnings growth, along with the change to stable interest rates, have propelled stocks so far in 2019. 

Even though US markets may be at or nearing highs, and International markets are doing well, we recommend that for your long term financial future, you do not exit the stock market. This should not be a time to sell off a major portion of your stock investments.We know that you cannot successfully and accurately time the markets and predict the high and low points.

Instead, as your financial advisor, we already have a plan in place to handle market increases, which we call “rebalancing.” We have developed an Investment Policy Statement for each client, which details the intended allocation to stocks, based on your specific circumstances. 

For example, if your target allocation to stocks is 50%, as markets increase and the stock allocation increases to 55%, we would review your accounts and consider selling certain stock asset classes, to bring that allocation back towards 50%. We do not do this in an attempt to time the markets or make short-term market predictions. This is a disciplined strategy of maintaining your desired stock allocation, which has the long-term benefit of selling high and buying low. 

This gradual tweaking of your portfolio does allow for some selling as markets reach new highs, but more importantly, also allows you the opportunity to gain from further long-term increases in the markets.

Remember, the stock market has many more positive days and years than negative ones.

Remember, US and International stock markets have increased significantly over years and decades. We expect these long term trends to continue, with bumps along the way, of course. 

To reap these long term rewards, you must remain invested in stocks. You must be in the game.  You should stay for the long-term journey.

And it’s our role to help you along the way, so you can remain invested and have the ability to reap the long-term benefits that stocks can provide. 

Prior to working with our firm, you may not have had a disciplined strategy for how to handle the stock market reaching new peaks. Now
you do. 

We provide you with understandable answers and advice to these key questions. We provide you with clarity and guidance, so you can have a greater sense of financial security, comfort and success. 

If you have friends or relatives that could benefit from the advice and 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. 

Source

“As Stocks Climb, Some Investors Wonder When to Get Out.”The Wall Street Journal, by Ira Iosebashvili 04/22/2019  


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


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

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.