Actionable Information

With the S&P 500 and other broad US stock market indices hitting new all-time highs, should this cause a change in your investment strategy?

Given the strong performance of many US and International asset classes during 2017, the information below is even more relevant today than it was last January, when we originally wrote this blog post. We updated it as of the end of 2017. The message still applies!

The Dow Jones Industrial Average (DJIA), an index of 30 US based stocks, was close to 20,000 for the first time in early January, 2017. The DJIA increased to almost 25,000 by the end of December, 2017. The S &P 500 was around 2,250 in early 2017 and increased to almost 2,700 by the end of December, 2017.

Should this cause a change in your investment strategy?  Should you be getting out of stocks?

History tells us that a market index being at an all-time high generally does provide actionable information for investors.  As the date below shows, all-time highs are generally followed by even higher levels in the future.  History and US stock market data would recommend that as a long-term investor, you should maintain your appropriate stock market allocation, even though markets may be at highs.  You should not be getting out of stocks.

As financial advisors, we recommend a globally diversified portfolio of US and International asset class stock funds, not just US stocks. For purposes of this essay, information on US stock is used, but the same logic can be applied to various asset classes and International stocks.

For evidence, let’s look at the S&P 500 Index for the last 90 years. As shown in Exhibit 1, from 1926 through the end of 2016:

  • Over the 1,081 months during the period, 319 months, or 29%, had new closing highs.
  • After a new monthly high, there were positive returns 80.5% of the time over the next 12 months.
  • For all 1,081 months, there were positive returns 74.7% of the time over the next 12 month period.

While this data does not help us predict future returns, especially in the short-term, it validates the importance of remaining invested over the long-term. It shows that the S&P 500 has been higher around 75% of the time 12 months later over the past 90 years. Staying invested and not making changes based on your emotions and current news events increases your likelihood of long-term investing success. And this data would be even stronger with the results of 2017.

Many studies document that professional money managers are not able to deliver consistent outperformance by making active picks and frequent trading. In the end, prices set by market forces are difficult to outperform. This is why we have adopted, and consistently adhered to, our investment strategy of using index-like mutual funds.

It is reasonable to assume that the price of a stock, or the price of a basket of stocks like the S&P 500 Index, should be set so their expected return is positive, regardless of whether or not that price level is at a new high. This helps explain why new index highs have not, on average, been followed by negative returns. At a new high, a new low, or something in between, expected future returns are positive.

So while expected future returns are positive, that does not help us know the future direction of stocks, especially in the short term. Historically, however, the probability of equity returns being positive increases over longer time periods compared to shorter periods. Exhibit 2 shows the percentage of time that the equity market premium (defined for this purpose as the Total US Stock market, over the short term US Treasury bill return) was positive over different rolling time periods going back to 1928.

When the length of the time period measured increases, so does the chance of the stock market premium being positive. As an investor’s holding period increases, the probability of a negative realized return decreases. This is why it is important to choose a level of equity exposure that you can stay invested in over the long term.

We can certainly not predict how the stock market will do in the next few months or even the next few years. We know it is normal for there to be ups, as well as regular declines of 10% or more, within a year. There was not a decline of more than 10% during 2017, so you should be prepared for such a temporary decline. It is normal.

However, we remain rationally positive that over the long-term, you will benefit if you remain invested in a globally diversified portfolio of asset class mutual funds, in an allocation which is appropriate for your personal situation.



Source: Dimensional Fund Advisors LP
Disclosure A: The S&P data is provided by Standard & Poor’s Index Services Group. For illustrative purposes only. Index is not available for direct investment. Past performance is no guarantee of future results.

Disclosure B: Information provided by Dimensional Fund Advisors LP. Based on rolling annualized returns using monthly data. Rolling multiyear periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences. Fama/French indices provided by Ken French. Index descriptions available upon request. Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP. Indices are not available for direct investment. Past performance is not a guarantee of future results.




Financial Lessons from 2017

As 2017 draws to a close, there are many financial and investing lessons to be learned.

It pays to be disciplined and remain invested. Few market analysts would have predicted the significant gains of the past two years of the broad US and International stock markets. Investors who stayed the course have been rewarded. Market timing does not work and will not work in the future.

Do not mix your political views with your investment policy or decisions. Whether you are a Republican, Democrat or Independent, allowing your political views or concerns to influence your investment decisions would have been detrimental to your financial health. The US stock market as defined broadly by the S&P 500 has done very well over the past 10 years, during both Democratic and Republican presidents. Yes, some political changes can impact the US stock market, but in the long term, corporate earnings and future earnings expectations drive stock prices, not politics.

Being broadly diversified, including internationally, is to your benefit. Both in the long term and short term, holding a significant allocation to stocks outside of the US, in the form of International and Emerging Market mutual funds, has been beneficial to our clients. While the US stock market has performed well in 2017, broad international and emerging market funds have done even better than US asset classes in 2017. As we discussed in our blog post “Benefits of Global Diversification,” dated April 13, 2017, a globally diversified portfolio far outperforms a US based large company portfolio in the long term. This year shows why this is valid.

Don’t get complacent with the lack of volatility. This year was historic not for its gains, but for the lack of volatility. This was a year without any major downturns and no broad market declines of 10-20%. While the economy may continue to do well, you should always be prepared for a temporary decline in stocks of 10-20% during any year.

It is hard to predict the future. It is hard to pick individual stocks and long-term trends.We are convinced and academic data proves that owning low cost asset class mutual funds is more effective than trying to pick stocks or hire a mutual fund manager who thinks they can outperform the markets over the long term. Another benefit of owning the broad asset class funds we recommend is that clients benefit from economic trends and changes, which may be hard to identify in advance. For example, investors who were heavily weighted in energy stocks a few years ago may continue to receive dividends or distributions from their investments, but the stocks or partnerships have significantly underperformed market averages. The energy bet may produce income, but a more diversified portfolio would be way ahead in terms of total capital. This same logic could apply to other sectors at different time periods.

Password and internet security is still important. We continue to stress that you remain vigilant regarding using strong passwords, changing your passwords a few times a year for key websites and not using the same passwords at multiple websites. We recommend using a password manager program, such as 1Password or other similar apps. These can be used on your cell phones, laptops, desktops, iPad or almost any other similar device. They will save you time, as well as provide you with greater security. Try it. You’ll like it! You should also be aware of phishing emails and check your credit card activity and statements regularly for unauthorized charges. Internet fraud is increasing.

Be prepared for disasters. Check your homeowner’s insurance coverage. Unfortunately, this year saw many hurricane and wild fire related disasters and many homes were destroyed. It is important for everyone to review their homeowner’s coverage, to make sure the value of their coverage is adequate for today’s replacement value. This is especially important if you live in an area that is prone to these types of disasters, such as Florida and California. Based on discussions with people who live in areas affected by the California wildfires, those with more expensive homeowner’s insurance providers expressed that it was well worth the additional premiums. The general feeling is that you get what you pay for. In this case, the extra costs will result in much better coverage and benefits. Make sure your computer records are backed up regularly and do some disaster planning in advance. I will write a more detailed post on this topic in the future.

We are truly thankful to our many clients and readers of this blog. We wish all of you a Happy Holiday Season! We wish each of you good health and happiness in 2018.

Writing this blog is work, which I feel is very worthwhile and effort well spent. There are not many advisors of firm’s of our size who write in this manner. We feel this is a vital method of communication to our clients, as well as learning, education and discipline for me. We hope that you are a better investor and person as a result of these weekly blog posts. This is the 50th post of 2017 and I will likely write #51 for next Friday. Thanks for reading!

Bitcoin Mania: What’s it all about

Bitcoin has gotten lots of attention over the past year, as its price has skyrocketed. This post is intended as an introduction to Bitcoin and cryptocurrencies. This is not intended to be a recommendation or advice regarding purchasing Bitcoin or other cryptocurrencies, as they are highly speculative and extremely volatile.

Bitcoin was introduced in 2009 and intended to be a new form of currency, in the way dollars or gold can be used as a form of payment or exchange. Bitcoin is a worldwide currency and digital payment system. Its value changes 24/7, not like stocks, which generally trade only during specific stock market hours during the day, in each country or region. Bitcoin and other cryptocurrencies are not physical. You can not hold or touch a Bitcoin.

Four years ago, Bitcoin traded around $125. Last December and early January, 2017, the price was in the $900-$1,500 range. By August, the price first crossed $3,500. Since mid-November, Bitcoin skyrocketed from the $6-7,000 to a range of $16-17,000 in the past week.

Bitcoin is traded all over the world and is not currently regulated by governmental agencies in the US and most other countries. It has been widely used for black market transactions, money laundering, or other illegal activities. This does not imply it is only for illicit purposes. However, if it becomes more regulated, demand for Bitcoin may decline, which would cause the value to decline. Per the WSJ, as of the end of November, Japan, South Korea and Vietnam accounted for over 80% of the 2017 global trading activity. In the past few weeks, the US share of trading activity has increased.**

I have followed this more closely since the summer, when a relative told me he had purchased some Bitcoin and another cryptocurrency starting in 2015. He has done this independently of me and is not a client of WWM.

What originated as a new method of currency has evolved into a hot investment. However, most currencies are not this volatile or speculative. Note that Bitcoin is only one of many cryptocurrencies.

We cannot emphasize enough how different Bitcoin is from stocks, bonds, gold or other investments. There is nothing backing it at all. There is no basis for any valuation methodology, like an individual stock can be evaluated relative to its future earnings expectations or underlying assets. Bitcoin is not an asset in that respect and has no earnings or dividend paying ability. There is supposedly a limited supply of Bitcoin, although more can be “mined” in the future. It has increased in value due to a huge spike in demand and media attention.

What no one knows is whether this will continue to appreciate or whether this is a huge bubble waiting to burst. We would offer the following advice to anyone who has held this and has significant “paper” profits: Sell some percentage of your Bitcoin holdings (like 15-20%) and take your profits in real cash. Sell off at least your original investment. By doing this, you will have realized some actual profit and still hold the remainder, if the price goes up in the near or long-term. As we do with stock investments we recommend, we would advise anyone with these types of holdings to gradually take profits if the value increases.

As of now, we cannot assist anyone in purchasing Bitcoin or other cryptocurrencies, as none of the major financial institutions, which function as custodians, have developed a method for holding it, let alone trading it.

From what I have read and heard, buying, selling and holding it can be somewhat complicated and costly on a percentage basis (significant bid/ask spreads), at least compared to buying and selling stocks, bonds or mutual funds. There have been reports that exchanges have not been able to process trade orders on a timely basis in recent days and weeks, as volume has surged.

Bitcoin is what is referred to as a “bearer security,” meaning you have the key/individual data for what you own….and if you lose that key, then you lose your investment, as no one else has that data. It is comparable to owning stock and the only proof of ownership is the actual stock certificate. If you lose your bitcoin blockchain data (your key), you would not be able to sell your bitcoin. For a humorous look at this situation, and a primer on Bitcoin, see “The Bitcoin Engagement” episode of The Big Bang Theory on CBS, which first aired on November 30, 2017.

There are different exchanges or places to purchase and sell Bitcoin, and as of now, the prices can vary significantly between exchanges, as CNBC has recently shown. This would be like Amazon’s stock selling for three different prices at the exact same time (say $1,000, $1,050 and $1,100)…which does not occur for a stock in today’s financial markets.

Some of these issues will likely get addressed in the future. Although this is not a brand new investment/currency, with its recent publicity, the controls and exchanges should improve. But that may take months or years. Bitcoin is considered an asset for tax purposes, so any sales are reportable as capital assets for US tax purposes. Thus, you are responsible for keeping track and reporting your financial data, such as purchase and sale dates and amounts.

Summary thoughts for now: I would not call this an investment, as we generally think of that term for our clients. Due to the incredible increase in price and very volatile trading, it is a highly speculative and risky bet.

As I have told my relative and others who have asked, I have never seen any form of investment increase in value like what has occurred in the past year, during my lifetime. And I doubt I will again. If I had purchased some years ago or even prior to October, I would certainly be taking some profits, with absolutely no regrets, even if it continues to increase. Nothing goes up forever. So the real question is, how high is up? No one knows. When it goes down from a peak, how fast will it go down and will it recover? Will you have sold or taken some chips off the table? Don’t be too greedy.

If someone wanted to speculate (note, I intentionally didn’t say invest) in Bitcoin, you should be prepared to lose a very large percentage of it. Bitcoin and other cryptocurrencies may be in their infancy, but as there is no real economic valuation to evaluate Bitcoin, other than demand, this is total speculation.

If you are interested, I highly recommend that you carefully read the following materials, especially the first two:

Bitcoin: Investment or Bubble? Larry Swedroe, Director of Research, Buckingham Strategic Wealth and the BAM Alliance (Our back office firm). This article was a reference source for some of this blog post.

SEC Public Statement: Statement on Cryptocurrencies and Initial Coin Offerings, SECChairman Jay Clayton, December 11, 2017

“Bitcoin Soars as Futures Start,” Wall Street Journal, print edition, page B1, December 12, 2017.

“Bitcoin Trading Overwhelms Exchanges,” Wall Street Journal, print edition, page B4, December 12, 2017

**”Bitcoin Lures Asia Investors,” Wall Street Journal, print edition, page B1, December 13, 2017

Tax planning during uncertainty

Tax planning is filled with uncertainty as two different bills were passed by the Senate and the House but have yet to be reconciled. It is not likely that a final version will be known until close to Christmas.

There is no way to know what the final bill will contain and whether it will get enacted by year end.

This post is to provide recommendations and guidance, but any actions or decisions should be discussed with your tax advisor and be based on your specific circumstances. This is intended to provide general information only, not political commentary.

Tax rates: In general, individual tax rates should be lower in 2018 than in 2017, so deductions should be accelerated into this year and income delayed to 2018, if possible.

The House and Senate tax rate schedules are different, so the impact on each person or couple will be dependent on your taxable income. The difference in the two rate schedules has not been widely discussed, but this is a key difference which will not be reconciled until the legislation is finalized.

Many of the changes in tax rates are temporary in the Senate bill, due to budgetary rules, and would revert back to current levels in 2026.

See a comparison of the current tax rates to the House and Senate tax plans at the bottom of this post.

Itemizing and Standard Deduction: You should review the amount of your itemized deductions (see Schedule A of your last tax return) and compare that to the proposed standard deduction figures. Each bill has a different amount as of now, but they are similar. The standard deduction for single taxpayers would be approximately $12,000 and married couples would have a standard deduction of $24,000, as of now.

By raising these standard deduction amounts, many taxpayers would no longer itemize in the future. If you fall into this category, especially after considering some of the changes/eliminations below, you should pay items which you currently can deduct in 2017, prior to December 31, 2017.

The higher standard deduction amounts are offset by the elimination of the personal exemption (was $4,050 per member of your family). If you are a family of four, currently you would deduct your itemized deductions if they were greater than $13,000 (current standard deduction amount for a couple) and deduct $16,200 of personal exemptions.

In the proposed bills, this family would get no personal exemptions and deduct the greater of the new standard deduction of $24,000 or the new definition of itemized deductions, which are discussed below.

AMT (Alternative Minimum Tax): The House bill repealed the personal AMT. The Senate bill keeps the AMT, but raises the threshold where the AMT affects taxpayers.

In general, the AMT affects those with significant deductions (not including charitable contributions) or capital gains income, relative to their overall income. From a tax standpoint, the AMT generally affects taxpayers with taxable income above $200,000 but usually does not impact very high income levels, as their deductions are a much lower percentage of their AMT income. This is a key item to monitor due to its impact and for the purpose of tax simplification.

State and local taxes: Both bills propose eliminating the deductibility of state and local income tax deductions. If you pay estimated taxes, you should accelerate your 4th quarter estimate for 2017 and pay it by December 31st. This is still being debated and may change, but most taxpayers would benefit from paying 4th quarter state or local estimates in 2017.

Property taxes: Under both bills, property taxes are capped at $10,000 per year, so if you pay more than this, you should pay any outstanding bills by year end, even if they would not be due until sometime in 2018.

The likelihood of eliminating the deductibility of state and local taxes and capping property taxes will mitigate (or offset) much of the income tax rate reductions for many taxpayers, depending on your specific situation, unless you have very high income.

Medical Deductions: Currently, this deduction is used only when someone incurs very high medical expenses, significant nursing care or at home medical expenses. The House bill eliminates the medical expense deduction and the Senate bill continues it for expenses greater than 7.5% of your AGI, if you are able to itemize.

Charitable contributions: Charitable contributions are not changed in either bill and would remain deductible, as long as you are able to itemize. This is one of the major deductions which remains unaffected, as of now. If you do not think you will be able to itemize in the future, you should consider accelerating your contributions into 2017, to get the tax benefit.

Other itemized deductions: As of now, other itemized deductions, which currently are deductible above 2% of your AGI and if you itemize, would not be deductible in the future. This would eliminate deductions for unreimbursed employee business expense, home office expense, investment and tax related expenses.

Child credits: These would be increased but are one of the main topics to be negotiated. They are currently subject to income limitations and that is expected to continue. Thus, if your income is above a certain amount, you do not get the benefit of these credits for children under 16 or 17. Due to budgetary issues, the Senate version would remove the increases in 2026.

Sale of your home: If you sell your home which is your primary residence, the first $250,000 or $500,000 of gain is tax-free (for single and married taxpayers, respectively), if you have lived in and owned the home for 2 of the past 5 years. The proposed change would be to 5 of the last 8 years. Also, you could only have one sale every 5 years which would qualify for the exclusion.

Estate tax: Currently, the estate tax exemption is $5.5 million per person. For a couple, assets above $11 million are subject to the estate tax, which is 40%.

Both plans raise the exemption amount to $11 million and $22 million, for single and married taxpayers, respectively. Estimates are that only 1,800 families per year would be subject at the proposed level, down from the current 5,000 per year now. The House bill repeals this change in 2024, so the exemption level would go back to the current exemption amounts.

From a planning perspective, we would still recommend the importance of estate planning that is focused on how you want your assets passed to heirs or charities, even if you are not subject to the estate tax.

Annual gifting: Both bills would double to $28,000 per person and $56,000 per couple, the annual gift exclusion from the Federal tax on gifts to children and other people.

Pass through income, corporate tax and other changes: At this point, the pass-through income provision is subject to significant change, so we will not be providing guidance on that topic. Corporate tax changes are beyond the scope of this blog. There are many other items which are proposed to be changed, but are not covered in this post. We have tried to cover most of the major changes or items which affect many people.


This week’s takeaway:  As the tax legislation will likely not be finalized until close to the end of the year, we recommend that you take steps now to pay items that will likely not be deductible in 2018, either because you may not be itemizing in the future or the potential changes would eliminate or reduce those items.



Tax rate comparison:


Trust, Winds of Change and Financial Advice

For any relationship to be successful, there must be trust.  This is obviously true for personal relationships, such as with a spouse, family members and close friends.

Trust and confidence in your financial advisor is also critical. 

For those who have worked with us for many years, we hope you have developed a strong level of trust in our advice and investment philosophy.

For those who are considering working with our firm, but have not yet made the decision to make a change to us as your financial advisor, trust may be a key factor in your decision. The other factor which you may need to overcome is dealing with a major change.

As I started writing this post, I saw a letter written by T. Boone Pickens, an 89 year old billionaire who decided to sell his huge 65,000 acre ranch in northeast Texas. In discussing his decision to sell this property, he said that “one of my keys to success has been the ability to accept and embrace change. That has been especially true in the fourth quarter of my life.”*

We view trust and change as elements which go together. As we reflect on the financial advice we have provided over the past 15 years, we are confident that our core investment philosophy and guiding principles led us to good decision making during a period of great change. Our clients have significantly benefited from our advice, consistent philosophy and discipline.

If the world, financial markets and technological change are happening so rapidly, how can you trust us to be able to handle these in the future?

We utilize an investment strategy which is quite adaptable to change, even if we can’t predict what the changes will be. By owning broadly diversified portfolios across countries, companies and industries, you will benefit from owning the companies which are successful in the long run. You will benefit from the long term economic progress which continues to occur both in the US and abroad.

Over time, we have reviewed portfolios of prospects who primarily owned stocks which we refer to as either legacy stocks (think of IBM and GE) or stocks which were purchased primarily for income and dividends, such as energy and gas stocks, telecommunication or other sectors.  These two categories, in general, have significantly underperformed major US and International stock benchmarks for many years.

These people have a choice. To paraphrase T. Boone Pickens, do you have the ability to accept and embrace the change which is necessary to switch advisory firms and modify your portfolio for a much better future? For those who were able to do this, they became clients. We worked with them, transitioned their portfolio and it has been very beneficial for them (and every one of our clients has done this at some point, when they first became clients!). They recognized that their former investments were not performing as well as possible and they recognized the rationale of our investment approach.

The winds of change: If you were using an investment advisor or mutual fund manager 5-10 years ago who was trying to pick stocks (let’s call them “active”), could that active manager or broker been able to accurately predict the seismic shifts which have affected vast parts of the economy? Would they have predicted the demise of numerous retail stocks over the past 10 years? Would they have predicted the drop in energy prices and vast underperformance of so many energy stocks? Would they have predicted which major financial institutions would outperform or underperform major benchmarks? Did they accurately recommend the correct technology stocks to own 10 year ago?

The winds of change are hard to predict, which is why we so strongly believe in the diversified investment philosophy we utilize. It is logical, disciplined and provides you with confidence.

Real energy change occurring: The following is another incredible example of change which is hard to predict, but which is occurring and affecting all sectors of our economy and lives.

A fascinating WSJ article on November 30th describes the transformation occurring in the energy sector. It describes how wind and natural gas usage are rising dramatically, causing record low electricity prices and the closure of older coal and other generating plants.**

The wholesale price of electricity in Texas last year was $25 per megawatt hour. A decade ago it was $55. In the Midwest, wholesale electricity prices are the lowest since 1999, which is as far back as the data goes. For a Midwest power grid, 8% of electricity was generated by natural gas in 2006. In 2016, that 8% grew to 27%. This is causing the closure of older coal and nuclear power plants.

For the Southwest Power Grid, which covers Louisiana to Montana, all the new power generation in 2016 was from wind, gas and solar. Wind is the fastest growing source of power even in Texas. Wind, which already generates 15% of the electricity in Texas, is expected to surpass coal as the 2nd largest source of electricity there by 2019.

What does this mean for you, as an investor? If major changes are rapidly occurring in the energy sector, how can someone accurately forecast which companies will either benefit or be hurt by these changes? If you own a portfolio of stocks, is your portfolio focused on companies which are reliant on the oil or gas business? Do you own stocks which are related to the production of wind turbines?

One of the major benefits of our investment strategy is that we do not have to be concerned with these issues. We are not trying to pick the winning stocks, hoping we will be right. We are focused on larger issues as part of structuring very diversified portfolios for our clients.

As we have often stated, we cannot predict the future. We do remain rationally optimistic and confident that in the long run, a globally diversified portfolio of stocks will be beneficial to you. We hope you share in our trust and confidence, and will benefit from our advice.


This week’s takaway: You must have trust and confidence in your investment advisor and their strategy. If you have the ability to accept and embrace change, you will be more successful. Major changes are occurring in the energy sector, especially the growth of wind generated electricity.



*T. Boone Pickens, LinkedIn post, November 29, 2017


Giving Thanks

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

Warren Buffett has often cited what he calls “winning the ovarian lottery,” which he feels Americans win the day they are born in the US. In lengthier speeches on the same topic, he cites the many aspects of your life which are determined at birth: the political and economic system you are born into, your health, gender, skin color and your level of intelligence.

While our country is certainly not perfect, we are thankful for its many virtues and the opportunities it has provided to so many of us.


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


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

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

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

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

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

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


Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday. The next email will be December 1st.

This time it’s different….or not?

Is this long term bull market different from those of the past? No.

Are things really different this time around? No.

This phrase comes into play when markets go through periods of major declines and gains. Think of the losses during 2008-09 or the huge tech increases in the late 1990s.

History and academic research teaches us that “it’s not different this time,” even if you may feel that it is.

As in the past, patient and disciplined investors will do best by adhering to their investment plan and a well thought out strategy.

Those who actively trade or try to time the market will most likely do worse than those who focus on the long term.

Investors who focus on low costs and diversification, such as asset class funds like we recommend, will have a greater chance of success. Data shows that lower investment costs are correlated with better performance.

Will this market end up in a bubble? It is possible. But no one can accurately predict exactly when this may occur. Even if they could, would they also be able to predict the bottom to get back in?

A bubble or temporary peak is somewhat normal for stock market activity. So are declines and corrections. The highs are generally too high and the lows are too low. Over time, the world’s stock markets continue to reach new highs and investors reap the rewards, even if they are interrupted by sharp, temporary declines along the way.

Investing may seem easy today, when markets are increasing. When the next major decline occurs, and major declines will occur again and again in the future, remember these words. It will not be different then. Each decline may seem scary and unexpected. How and when the market will recover may seem unclear. Negativity and fear will be everywhere. Most people will think it is actually different this time. But you will know it is not truly different. Just the specific circumstances will be different. That is when this historical perspective will come to your aid. We will provide you with rationality during the uncertainty. We will remind you that optimism is the only realism.

The stock market today has some individual stocks which appear to be quite overvalued. This has been the case for some individual stocks for many years. But individual stocks are not a game we feel is worthwhile to play with your serious money. Investors who buy these hot large cap growth stocks may be successful, but they also are at much greater risk when the next downturn occurs or when one of these companies incurs an earnings miss.

At the same time, there are many asset classes and individual stocks which are more reasonably valued. As no one can accurately predict in advance when an individual stock or asset class will rise or fall, we will continue to recommend that our clients remain invested in a globally diversified portfolio using asset class mutual funds, according to their personal Investment Policy Statement.

This time is not different. There will be a correction at some point. But we have not advised our clients to wait on the sidelines for that to occur. In the words of legendary mutual fund manager Peter Lynch, “far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Our goal is to provide you with advice which will enable you to secure a real-life outcome superior to that achieved by the vast preponderance of your peers. This is different.

This week’s takeaway: Stock markets increase over time. Corrections and significant declines will occur, but they will be temporary and the markets will recover. The cause and timing of these corrections cannot be predicted. During these times, when the markets are down and many others say “this time it’s different,” it will not really be different.

The financial markets today and going forward

The stock markets in the US and the world continue to be very rewarding for most investors.

If you are broadly diversified, you should be benefiting from solids gains over the past years.

We see the economy as continuing to be strong and the majority of companies continue to report good revenue and earnings growth. Companies which are not growing or are being impacted by innovation and strong competition (many retailers, grocery store chains and energy companies, for example) have seen stock market returns far below the general market averages.

Stock market returns are correlated to current and future earnings expectations of companies. Over time, greater earnings result in higher stock prices. For evidence of this, take a look at GE and IBM over the past decade and Under Armour, which declined over 20% in one day this week after reduced sales expectations.

In the short term, stock market returns can be impacted by politics, but long term returns are not driven by politics. Our best advice is to ignore day to day politics and focus on the long term growth of the great companies of the world.

One of our core principles, grounded in academic financial research, are the following relationships: small stocks outperform large stocks, value stocks outperform growth stocks, International stocks outperform US stocks and Emerging Market stocks outperform US and International stocks. While our recommended portfolios have exposure to many asset classes, we recommend exposure to small, value, International and Emerging Market stocks, as they have greater long-term returns.

While these relationships do not hold true every year, we believe they are valid and will be rewarding for disciplined investors who are patient over the long term.

While valuations of certain individual stocks and some US indices seem quite high, the returns of some major indices have been driven by the performance of a small number of companies. The Dow Jones Industrial Average (DJIA) is comprised of 30 stocks. The WSJ reported yesterday that Boeing alone accounts for most of the DJIA’s gains for this year. For October, 3M, Apple, UnitedHealth, Caterpillar and McDonald’s accounted for over half of the DJIA’s gains. Our globally diversified stock portfolios consist of thousands of stocks, so your returns are broad based and not due to just a handful of companies. This should be reassuring to you.

As markets have risen, many commentators have stated that valuations are excessive and others ask if it is time to get out of the market. Valuations are much more reasonable for the asset classes we focus on, particularly considering that global interest rates are still historically low. The asset classes we recommend greater exposure to, such as small value companies, International and Emerging Markets, are cheaper than many major US stock indices (such as DJIA, S & P 500 and NASDAQ) based on various valuation metrics. Thus, given that these asset classes have provided solid returns and are still cheaper than many US stock indices, we are confident in our portfolio positions.

This does not mean that a market decline or correction cannot occur in the near term. On the contrary, markets are long overdue for a 10% or greater decline, on their longer term path higher. However, we would not recommend changing your stock allocation today just because of the gains of the past years.  Those who have not been invested in the stock market, who are concerned or have been waiting for a pullback for the last year or two, are far behind those who have stayed the course and remained invested according to their written investment plan.

Our investment strategy of monitoring your portfolio to maintain your appropriate allocation to stocks provides you the benefit of discipline and the reward of “selling high.” We are disciplined about rebalancing throughout the year, not just at year end. We do not sell an entire asset class, such as completely getting out of emerging markets because it has outperformed this year. We may take some profits, but still leave exposure to each asset class.

We are positive about the announcement of the new Federal Reserve Chairman, Jerome Powell.  His appointment requires confirmation by the Senate.  He is expected to continue along the same path as Chair Janet Yellen, who has managed the transition of the Fed well during her 4 year term, which ends February 5, 2018. The US stock market had strong gains during her 4 years as Fed Chair. We expect Powell to lead in the same manner in the future, with gradually rising interest rates over the next few years, with some commentators suggesting he may be less restrictive from a regulatory standpoint.

The world is constantly changing. No one can predict the future. We could not have predicted the success of Apple, Amazon or Facebook’s stocks 10-15 years ago. But we also don’t know how these stocks will perform over the next 10-15 years. Past performance does not guarantee future returns.

Similarly, we could not have predicted 10 years ago that Bed Bath & Beyond would be worth much less today, Merck would be worth about the same and Exxon Mobil would be worth less than it was in 2007. These are just a few examples of why we believe in the broad diversification of using asset class mutual funds, which have dramatically increased in value over the past 10 years.

This week’s takeaway:

The asset class funds which we recommend are very broadly diversified and hold thousands of stocks. Their returns have been solid and not concentrated in a few stocks. There are some major indices whose increases are due to a small number of stocks. Also, the valuations of the asset classes which we overweight are more reasonably valued today than major US indices. This should be reassuring for our clients.

Chutes and Ladders

The board game Chutes and Ladders represents a journey through life, with its ups and downs, unexpected surprises and sudden disappointments.  

Life rarely works out as we hope, plan and dream about. Unpredictable things occur. Change happens.

We all have to deal with job changes, health issues, relationship struggles and volatile financial markets.

We view our role as your financial advisor very broadly, so that we can help you with the chutes and ladders of life’s uncertainty. We understand these events have emotional and financial effects on you, your family and your financial plan.

Dealing with the unpredictable Chutes and Ladders of life from our clients’ perspective was the main theme of the 2017 BAM Alliance Annual Conference which we attended this past week.

The chutes and ladders of life. We all have a personal story.

I have dealt with my own chutes and ladders. My dad left our family when I was a teenager. I attended the college I dreamed of (on financial aid, loans and work study jobs) and worked at Price Waterhouse. I got married, had three children and a good career. Life was good. I did not plan for a divorce in 2008. I did not expect to remarry five years later in 2013.

We can learn from change, become better people and be more resilient. Life gives us second chances.

My daughter’s pediatric scoliosis was under control in June 2011 (see blog post link 6/24/2011). A routine check up in December 2012 resulted in spinal fusion surgery in January 2013. We faced decisions. We had confidence in her amazing doctor. We trusted her with our child. We signed very scary papers the morning of her surgery. Rachel now has the equivalent of two titanium golf clubs in her back and is fully active. When we got in the car for a trip this summer, “Titanium” came on the radio. “My theme song,” she exulted! A chute had turned into a ladder.

Sometimes you fall through the chute later in life. A spouse passes away. Or a spouse files for divorce. We have helped clients who are surprised by a divorce after many decades of marriage. We provided compassion, empathy and support to help them get through the day to day shock and transition to their new life.

Sometimes the ladder goes higher than you ever expected. You are blessed with good kids and grandchildren. A career change exceeds your expectations. A key decision becomes life-changing. Keith and I feel fortunate, as our transition from conventional CPAs to full-time financial advisors and the growth of our firm has been remarkable.

We have advised clients who had business or real estate successes. We have guided clients through the chutes and ladders of business sales.

We listen to clients who share the pains and stresses of very serious illnesses or issues which affect their children or grandchildren.

We are rationally optimistic, both in our personal and professional lives. This rational optimism is inherent in the broad financial advice and counsel we give to our clients.

Unexpectedly, investments go up. Unexpectedly, investments go down.  The decline is always temporary, but it can be shocking and emotional to experience and live through in real time. In 2008-09, we were a listening board for our clients. They wanted to talk. They shared their fears and concerns. We listened. We answered questions. We helped our clients to stay the course, so they could adhere to their long term written investment plan. This was the right strategy then and it will be the right strategy the next time the stock market has a significant decline (and the temporary declines after that).

Gratitude is an important component of success and happiness, yours and ours. We are truly grateful for our clients.

We are not here to sell you products.

We are here to help you through the chutes and ladders which life throws at you. To help you cope with uncertainty. Financial and otherwise. Not all the squares on the board fall neatly into the description of the typical wealth advisor. We don’t strive to be typical. We do strive to provide encouragement, guidance and support when you need it most.

This is our value. We are here for you.

In good times and bad. In whatever way we can help.

This week’s takeaway: Life happens. It is full of chutes and ladders. Some of our value as your financial advisor is to help you deal with the unexpected surprises in your life (good and bad) and help you make good decisions in a rapidly changing world filled with uncertainty.

Decisions: Past, Present and Future

What do you have from 2002 or 2003 which you still value?

What relationships? Any investments? Any stocks or stock funds?

What did you acquire or begin 15 years ago which are still important to you?

Remember, in 2002, the iPhone and Facebook had yet to be invented, Netflix came by DVDs in the mail and Blockbuster stores were still everywhere. Lots has changed since then!

In October 2002, I attended my first BAM National Conference, when we were initially investigating how to provide investment advisory services. I quickly realized BAM Advisor Services was the right group of people with the right tools and ideas for us. BAM would be the source for the investment philosophy and intellectual resources we would need to advise our future clients.

Our introduction to BAM and their investment philosophy led us to the investment approach of a major and growing mutual fund group, Dimensional Fund Advisors (DFA), which would become the primary stock mutual fund provider for the vast majority of our clients’ stock investments. We have been pleased with this decision.

For the 16th straight year since 2002, I will be traveling this weekend to attend the BAM National Conference in St. Louis.

Have you done anything for 16 straight years? If you have, and you were not going under duress, it must be very worthwhile, right?

As we are nearing our 15th year of providing investment advisory services, we realize the critical importance of these early decisions. These decisions have had a direct and very positive impact on each of you, our clients.

We often say that we cannot predict the future. It’s true….we can’t!

However, you rely on us to help you assess and deal with an uncertain future. You expect us to make good decisions, even with uncertainty, which will have long and important implications for you and others close to you. You judge us by the advice and decisions we make.

When it comes to the quality of these vital decisions, selecting BAM, DFA and our investment principles, we are confident that we selected firms and concepts that would, and have, withstood the test of time, through good and bad markets.

As we look back, and forward, our relationship with BAM and use of DFA funds have been integral in the development of our investment philosophy.  BAM is also a key factor in our firm’s delivering excellent, accurate and responsive service to our clients.

DFA’s stock mutual fund philosophy was new to us in 2002. Today, we feel that DFA is the foundation for the best way to invest serious money for the long term. They have consistently beaten or out-performed their asset category averages over the 15 year period ended September 30,2017.** They are reliable. They are very low cost. They offer tax-efficient funds, whichlower your tax bills for non-retirement accounts. They are not dependent on one or two star money managers or analysts for their results. They have a methodology and culture which we are confident will provide strong returns well into the future.

DFA confirmed their 15 year outperformance relative to benchmarks and similar competitor funds across a variety of investment categories in a chart this week. This data, available upon request,** shows that DFA funds we have utilized and recommended for the long-term have performed near the top of their respective categories, far above most other funds in respective categories and have outlasted the 30-50% of funds which existed 15 years ago that have not even survived the 15 year period ended September 30, 2017.

We are confident in the long term expected returns of DFA’s stock mutual funds. “Combining the category attrition and the surviving funds with lower net return ranks gives a better sense of how Dimensional’s equity funds have fared relative to their peers…The results suggest that investors in Dimensional’s equity funds would have enjoyed strong relative performance over the past 15 years in each of the equity asset classes shown.”**

We cannot predict the future, but we are confident in our decision making. As the world, and the financial markets specifically, are continuously evolving and changing, we and the firms we work with must also continue to grow, change and be continually learning. We are always open to new ideas and concepts.

This is why we continue to attend the BAM Annual Conference every year. These are not rah rah sales sessions. This is why Keith and I travel to participate in multiple peer-peer learning group sessions every year and peer calls throughout the year. We ask questions. We listen to top speakers across diverse topics. We discuss client issues. We gain knowledge we can bring back and use as we provide advice and guidance to you, our clients. That is part of what we will be doing from Saturday until Tuesday with our BAM investment peers from across the country.


This week’s takeaway: In 2002-03, we began the process of forming and starting what is now WWM, a thriving financial advisory firm. We partnered with BAM Advisor Services and began to invest and recommend DFA stock mutual funds. We expected that each of these firms would provide us and our clients some of the following characteristics: excellence, confidence, reliability, valuable information and consistency.We made the right decisions and they have delivered on our expectations.  For the benefit of our clients.


**Source: Dimensional chart and supporting data: “Relative Performance of Flagship Equity Funds,” as of September 30, 2017. Published October, 2017. Available upon request.