Conversations You Should Have

Blog post #484

Hopefully many of you will gather with your family or extended families this Memorial Day weekend. The discussions at these gatherings are generally the same: updates on kids, grandchildren and relatives, health, politics, sports, food and restaurants. We can even include future travel plans this year!

In most families, however, the topic of money is rarely discussed. These types of discussions should be occurring.

We all have unique and different family backgrounds and stories about money. I did not get an education about money or investing from my parents. We grew up as a lower-middle income family. I know that my mom struggled financially and worked very hard to support me and my three sisters. As there was no extra money to invest, I did not get the opportunity to learn about investing from my parents.

While in high school, I often talked with my mom about how I would pay for my college education, how much I had to work and save for my college education.

Fast forward 40+ years… and now I advise people professionally about their money. We have many discussions about your finances, your goals and how to deal with the volatility of the world and financial markets. These discussions are critical, and the educational aspect of these conversations hopefully makes you, our clients, better and more successful investors.

I want to emphasize having conversations about money between generations. These can be uncomfortable discussions, but they don’t need to be. Start gradually. Find a topic to begin with. Dip your toe in the water. If these discussions take place, great sharing and important long-term benefits can result. They can be some of the most memorable family conversations you can have.

  • Talk to your children or grandchildren about your financial successes, as well as your financial mistakes. Be willing to share the good and the bad.
    • Be vulnerable.
  • Share with them how you were able to save money. When did you start saving?
    • What kind of sacrifices did you make, for your long-term future?
    • We gave up extravagant trips when my children were young, in order to save money for their college educations. They have benefited from that today, which we have talked about, as they don’t have student loans.
  • Talk about what types of investments have worked out (individual stocks or mutual funds?) and what types of financial advisors you have used.
    • Why were some successful and some not as good? What was the difference?
  • You can talk about credit cards, reward points or password security. Just begin the conversation.

A possibly harder, but important conversation, deals with talking about your estate planning. Once an estate plan is completed, it usually becomes a set of documents that remains locked in a cabinet. Depending on your age, and the age of your next generation of family, you could discuss your estate plan. This can be done in broad terms, without focusing specifically on the numbers.

If this kind of estate planning discussion is relevant to your stage of life, I’m suggesting that parents and grandparents sit down with their next generation, or generations, and talk about their “family finances.” What is your intent? How will things be handled? By whom? I’m encouraging you to make your estate plan real. Make it a living, breathing document and set of plans. Do it now, while you are healthy and able to have the discussion.

Not everyone is comfortable with this type of estate planning discussion. If you want to have this conversation with your family and would like our assistance, we would be pleased to join your family for this discussion.

The telling of stories is how family histories are remembered and past down to future generations. Discussions about money, how you saved and possibly sacrificed, are worthwhile. Sharing the good and the bad, the mistakes and the successes, are important as well. Parents and grandparents should share their financial and investment lessons with their next generations. These would be very valuable, memorable and impactful.

Do it sometime. Anytime. But sooner rather than later.

The Benefits of Small, Value and Patience

Blog post #483

Since our firm was founded in 2003, we have been strong believers in holding widely diversified portfolios, with significant exposure to factors that have historically provided greater expected returns.

In practice, this means building client portfolios with additional weighting of small company asset classes, as well as to value stocks, both in the US and Internationally.

One thing that we can all agree upon is that none of us could have predicted the events, technological and political changes and even a global pandemic that have occurred since 2000. We have experienced 9/11, the Great Financial Crisis in 2007-09, changes in Presidents and Congress, tax increases and tax cuts, iPhones and other technologies, as well as Amazon and changes in shopping.

How has this investment strategy worked over the past 21+ years, through all these changes?

As the data below shows, adding small and small value companies to a portfolio provided significant benefits since 2000, versus a portfolio consisting of only the S&P 500 (US Large companies). Please note that for purposes of this post, we are using indexes, rather than the actual mutual funds we recommend, for compliance reasons. We feel that our investment recommendations would show similar results. Also, this illustration is for US stocks only, and all references below are only to US asset classes.

From January 1, 2000 to March 31, 2021, as the chart below shows, the Russell 2000 Value index (US small company value index) grew from $1 million to $7,662,000, whereas the S&P 500 Index (US large company index) grew to $4,076,000 over the same time period. US small company stocks, as represented by the Russell 2000, would have also significantly outperformed the S&P 500 during this period, as $1 million grew to $5.8 million.

Some of the key takeaways from this chart are:
  • Despite all the events that have occurred over the past 20+ years, staying invested in stocks, large and small, growth and value, was rewarding to investors. It pays to be patient and remain invested for the long-term.
  • Owning US small value stocks was very beneficial, and more rewarding over the 20+ years, than only owning the S&P 500.
  • Owning small company stocks, not just small value stocks, was rewarding.

However, there is much more to this story. It is really three different stories, as the 2nd chart below shows. During the first decade beginning with 2000, small and small value stocks far outperformed US Large company stocks, as represented by the S&P 500. The Russell 2000 Small Value Index grew by 121% from 2000-2009, while the S&P 500 had a NEGATIVE 9% return for the same 10 years.

  • From January 1, 2000 – December 31, 2009, $1 million invested in these indices would have been worth the following as of December 31, 2009:

  • For a decade, those who only owned US Large company stocks were not rewarded with the expected returns from stocks, which averages around 8-10% per year.
  • The expected returns of each asset class does not always appear for extended time periods. That’s why we diversify and own many different asset classes.
  • Around 2010, small and value seemed liked winners and large company stocks were trailing badly.

The next decade, 2010-2019, was very different, as US Large company stocks (+257%, $3,567,000) far outperformed small (+206%, $3,058,000) and small value stocks (+173%, $2,730,000). While all these asset classes were rewarding, some investors were questioning whether owning small and small value made sense, as the technology heavy S&P 500 was doing so well due to stocks like Apple, Amazon, Facebook, Google and others.

To us, and for you, our clients, the real evidence is in the far-right column of this chart. The returns for 21 years plus 3 months, from January 1, 2000 to March 31, 2021 are:

If you were disciplined and patient and kept an exposure to small and small value stocks, you were very well rewarded over the long term. 

We believe in having various exposures to most stock asset classes.

Technology:  we recommend owning them.

Growth stocks:  We recommend owning them.

Mid-cap stocks:  we recommend owning them.

Dividend paying stocks:  we recommend owning them.

You get the idea. All of these are components to a well-diversified portfolio, that we believe should include exposure to small and small value companies, as they have greater expected returns than the above asset classes.

As these charts explain, over varying time periods, certain asset classes will not always perform as expected or provide the best returns. But over the long-term, financial data and real market returns have shown that following these recommendations for building a diversified portfolio can be quite rewarding. 

These are strategies that can provide for your future growth for your retirement, or provide you with the funds to live and have the type of retirement that you desire.

Talk to us. We want to listen. We want to assist you, your family members and friends.

Important disclosures: See disclosures beneath each chart. Additional information provided by Dimensional Fund Advisors. This data does not include costs of the investments or any investment advisory fee, such as WWM would charge a client. WWM did not begin to provide investment advisory services until 2003, but we feel this information is relevant and consistent with our investment recommendations since 2003.

Investing at Market Highs

Blog post #482

At the end of April, 2021, most US stock market indices are near their all-time highs.

What does that mean for your current, and future, investments?

As Exhibit 1 below indicates, when the S & P 500 has reached highs in the past (for data from 1926-2018), the S & P 500 went on to provide positive average annualized returns over the one, three, and five years following new market highs. And those returns were significant, averaging over 14% during the subsequent one year and around 10% over the subsequent three and five year time periods.

Please see Exhibit Disclosures below.*

What does that mean for you today? It means there is justification, based on historical financial data of almost 100 years, that new market highs today are NOT a sign of negative returns to come over the next 1-5 years, on average. While none of us can predict what will occur in the next few weeks, months or years, this type of rational optimism is the basis for remaining invested for the future.

We believe in broadly diversified portfolios, investing in much more than just the S & P 500, which represents only large, US based companies. However, we feel this data should give you confidence to remain invested for the long-term, with a stock allocation that is appropriate for your personal circumstances and time frame.

While some asset classes are at high levels, other asset classes may not be at highs or have valuations which are significantly below the valuations of US large stocks. This is where our discipline and planning can benefit you.

When you begin as a client with us, we develop a target asset allocation plan, based on your personal goals and time horizon, say 65% stocks and 35% fixed income. As stocks have increased, your stock allocation may have grown from 65% to near 70%. As this occurs, we are disciplined. We would review your account and consider selling some asset classes of stocks to bring your stock allocation back to 65%.

This is called rebalancing. It is the discipline to sell when stocks increase and buy when they decline. We review this on an overall basis, on a US and International level, as well as at each asset class level. We balance the tax ramifications of selling versus the increased risk of allowing your stock allocation to grow way higher than the risk target level we planned with you.

As stocks have recovered since March 2020 and are now significantly higher, in general, we are actively reviewing client accounts that need to be rebalanced. This is the discipline and one of the values we provide to you. We will take profits and keep your stock allocation in line with your asset allocation target.

In addition to our rebalancing discipline, we want to remind you about expected volatility that is normal with investing in stocks.

You should expect that in most year’s there will be a decline of around 10% in stock values, from a peak. This does not mean that the full year will be negative, it just means that at some time during most years there are declines of around 10% and then recoveries. This is the normal volatility we must endure to reap the longer-terms rewards of investing in stocks.

In other periods, usually every 3-5 years, there are major stock market declines of more than 30%. These may be fast or take a few years to go down and many years to recover. These are normal and should also be expected.

A few mornings ago, the CNBC screen read something like: Analyst: brace for 10-20% decline. I thought to myself, investors in stocks should always be prepared for that type of decline. It is normal. We just don’t know when it will occur. Remember, declines are temporary on the long-term upward trend of stocks. 

If you can handle the volatility, the positive news is that you don’t need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remain disciplined in the face of short-term noise.

By focusing on the things you can control (like having an appropriate asset allocation, being diversified and managing expenses, turnover and taxes), you can be better positioned to make the most of what global stock markets have to offer.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.  

*Exhibit 1 Notes:

In US dollars.  Past performance is no guarantee of future results.  New market highs are defined as months ending with the market above all previous levels for the sample period.  Annualized compound returns are computed for the relevant time periods subsequent to new market highs and averaged across all new market high observations.  There were 1,115 observation months in the sample.  January 1990–Present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926–December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only.  Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the managment of an actual portfolio.  There is always a risk that an investor may lose money.

Source:
“Timing Isn’t Everything”, Dimensional Funds, July 1, 2019

If it’s too good to be true….

Blog post #481

Bernie Madoff, who ran one of the largest Ponzi schemes ever, died this week in jail at age 82. He defrauded investors of almost $65 billion in paper losses, which came to light in 2008 during the Great Financial Crisis.

There are lessons to be learned from the Madoff incident, as well as how the regulatory system which governs investment advisory firms like ours changed for the better.

Madoff bilked many wealthy families, in NY and Florida particularly, as well as charities, institutions and endowment funds in the US and globally. They were lured by his years of positive returns and reputation as a leader on Wall Street.

The key lesson is that Madoff “reported” years and years of only positive returns to his clients. They became more confident of his firm and referred others. Madoff never reported down periods once his Ponzi scheme got going in the 1990s. That is not realistic.

We often talk about when you invest in stocks there will be frequent time periods that your investments will go down. We all know that, but these very wealthy individuals and institutions kept believing that Madoff was so good that he never lost money.

Our advice to you is that if returns are too good, or seem consistently too good, you should look at that investment concept/manager/advisor very carefully and with lots of skepticism.  No one can invest in the stock market and always generate positive returns.  No investment only goes up and never goes down (that we know of).  This is advice that you should always remember and discuss with your family, especially your kids or grandchildren, as they learn about investing.

After the Madoff scandal, the Securities and Exchange Commission (SEC), which governs our industry, encouraged Registered Investment Advisers (RIAs) to place their clients’ assets in the custody of an independent firm (like Fidelity or Schwab), unlike Madoff did. This is what is referred to as the custody rule. WWM does not have custody of your assets. When you open an account with our firm or make a future deposit, you write a check payable to the custodian (or wire funds directly to the custodian). You will never write a check to WWM. The funds are paid directly to the custodian, such as Fidelity Investments or Schwab. Madoff did not use an independent custodian like Fidelity, which is how he was able to pull off the Ponzi scheme.

When you want a disbursement of your assets, the custodian will never write a check to WWM.  The funds are only disbursed to the account holders, their bank account or if you want a check sent to another party, multiple forms are required for security purposes.  When you open an account, want to link your bank account to your custodian or get check writing privileges, there is always lots of paperwork.  All these steps, documents and requirements are to prevent a Madoff-like scenario from occurring again.

For nearly all of our client relationships, WWM is considered to not have custody over these assets. The assets are held at an independent custodian (Fidelity or Schwab) and WWM has no control or withdrawal privileges over these accounts.

There are situations where RIAs such as WWM can have “custody” rights for certain clients, at the client’s request. For example, WWM (or the firm principals) have been named as Trustee for several client accounts, at their request or in their estate planning documents. In these situations, we still use an independent custodian, but we are considered to have custody, or control of client assets. Because of the SEC custody rules, we must annually disclose these accounts to the SEC. WWM is then subject to an annual surprise exam by an independent CPA firm, to protect the investors’ assets and verify that those assets actually exist. This surprise examination provides another set of eyes on the clients’ assets, thereby offering additional protection against the theft or misuse of funds.

We take our responsibility to invest and safeguard your assets very seriously. We want you to know that we are diligent about adhering to our regulatory obligations. We know that Fidelity and Schwab work hard to maintain their custodial relationships with you very carefully.

We hope that a Madoff-like scandal never occurs again, but we know there will be other fraudulent incidents in the future. There are constant cyber-security threats ongoing all the time. We must all be careful and diligent.

We work hard to build our trust with you. And we plan to keep that trust.

Talk to us. We want to listen. We want to assist you, your family members and friends.

 

 

What a quarter and what a year!

Blog post #480

As we all know, the last 12 months have been unlike any that we have liked though before.

With further vaccine production and distribution, hopefully the US and world will gradually return to more normalcy in the coming months and years.

Financially, the past 12 months and the past quarter have provided excellent returns for investors of diversified portfolios.

We each have stories of how we have adapted to the Covid environment or how we have changed things in our lives. For me, purchasing a Peloton bike after Thanksgiving 2019 proved to be fortuitous. I have been more disciplined to ride consistently, as well as adding stretching and strength training, than I ever have in my life.

I have developed a discipline and routine that I want to continue for years to come. Exercising must be a lifetime commitment. This should be a habit that I continue for weeks, months, years and decades to come, similar to the best practices for long-term savings and investing.

Just as in investing and striving to reach financial goals, my exercise practice has been based on:

  • developing a plan,
  • being disciplined about exercising,
  • diversifying my exercises and types of rides,
  • and make adjustments as needed, over time.

During March 2020, as Covid cases worsened throughout the US and world, global financial markets dropped significantly…and then started an incredible rebound on March 23, 2020 (way before the economic recovery began!!).

As we have written about before, we recommended to our clients to remain disciplined throughout the Covid crisis.  Stick with your asset allocation plan.  Buy low.  Rebalance by selling fixed income and gradually purchasing stocks.

One year later, as we reflect on the past 12 months, being disciplined and sticking to your plan has been financially rewarding. Just as we benefit by doing different types of exercises (cardio and strength, not just cardio!), having a diversified portfolio has been rewarding.

Since the market bottom, but particularly since the beginning of November, 2020, the factors (or asset classes) that our firm emphasizes have far outperformed the broad US market indices, such as the S&P 500 or Dow Jones Industrial Average. While large US growth stocks have done well for many years, late 2020 and the first quarter of 2021 have been outstanding for US small company stocks, US large value and US small value stocks. So far in 2021, International value, small and small value company funds have far outperformed US large growth stocks.

A financial academic would believe that the benefits of owning stocks, called the equity premium, should exist every day. That would mean that they expect that stocks should be positive every day. But we know that over the short term, or sometimes for years, this does not occur. Stocks can be very volatile in the shorter term. However, over long periods of time, the equity premium does exist, as the benefit of owning stocks for the long term far exceeds other investment classes, such as cash or fixed income (bonds).

We recommend globally diversified portfolios, which means that we recommend stock investments in nearly all broad sectors, such as large and small, growth and value, US and Internationally. But we recommend a tilt, or more exposure, to small and value companies, as well as investing internationally. We recommend this because these asset classes provide greater expected returns (premiums) and diversification benefits, than just owning US large company stocks.

By being patient, and rebalancing to maintain exposure to these varying asset classes, we are now seeing the benefits of remaining disciplined and owning small company stocks and value stocks, as these factors are providing significant rewards in their performance.

All these are factors that help you towards your financial goals.

I need to do different types of exercises to remain fit and healthy over the long-term. In our opinion, your portfolio needs to be well diversified for long term success.

I need to be disciplined to exercise many times per week. You need to be disciplined to be a successful investor.

I need to change my workouts as I get stronger or want to focus on different parts of my body. We need to rebalance and make adjustments to your portfolio, based on changes in your life and changing market conditions.

We wish you good financial and physical health in the future! We are confident that we can assist you with your financial needs, but we are not yet prepared to expand into exercise training (though Michelle Graham may be able to help you)

Talk to us. We want to listen. We want to assist you, your family members and friends.

 

A Philosophy You Can Stick With

Blog post #479

“The important thing about a philosophy is that you have one you can stick with.” 

~David Booth, founder and chairman of Dimensional Fund Advisors (DFA).

That was the beginning of a blog post I wrote in July, 2013, almost 8 years ago. The philosophies and concepts from that blog post have endured the test of time.

Prior to founding this firm in 2003, after the tech bubble crash, I spent many years researching how best to provide investment advice. How would WWM be different? How could we provide a better experience for our clients than they were having with their existing financial advisors or by investing on their own?

I read extensively. I went to conferences. I attended my second AICPA Personal Financial Planning conference, in Philadelphia in 2001. I went from exhibitor to exhibitor and talked to many firms. And then it happened. I found the book that would change my business life, and the lives of our clients. It was my “aha” moment.

On the Friday afternoon train ride after the conference ended, I started reading “The Only Guide to a Winning Investment Strategy You’ll Ever Need,” by Larry Swedroe. I could not put it down. I read until late Friday night and throughout the weekend. I had found an investment philosophy that we could stick with. Today, we still strongly believe in many of those concepts.

For almost 20 years, we have strived to provide clients with an investment and financial planning experience that would enable them to meet their financial goals. We have used a consistent market philosophy and systematic investment process that provides transparency and clarity, which can increase your confidence that these strategies will deliver upon their objectives over time.

Many people view investing and the stock market as trying to make accurate predictions or forecasts.

They may ask, is now the right time to get into the market? Is now the right time to buy Apple, Google or Netflix? Is it safe to invest now, since the economy seems to be recovering? Great, in which case I’m going to move money from cash into stocks. But what if the market has already made its big move? How do you know when is the right time to buy or sell?

We take a different approach. One that is rational, understandable, disciplined and consistent. Instead of trying to make predictions and guess which stocks will do best, our strategies rely on decades of research into the expected returns that have benefited investors over the long term. Having a realistic view of the markets can help take the guesswork out of investing. You should be able to relax more by knowing that your strategy is built on a solid philosophical framework and a strong track record.

Instead of trying to predict the market, we work with you to determine an appropriate allocation to stocks, based on your needs, goals, timeframe and willingness to take risk. We view your life and your finances in a comprehensive manner and try to help you with advice as you need it.

Once we determine an appropriate allocation to stocks based on your individual circumstances, we design a broadly diversified portfolio of stocks which covers many asset classes, both in the US and globally. We strive to increase your expected returns by giving greater weight to small cap, value and high profitability stocks in US and International stocks. We don’t recommend this because we think these asset classes will do better over the next 6 months, but because they should do better over the long-term.

We know the future is uncertain. This is why we recommend broadly diversified investments, in both stocks and fixed income, as well as utilizing mutual funds and ETFs with very low costs. We strive to control those things which are controllable.

We utilize investments with clearly defined parameters, so that we can help you to understand the range of outcomes and what you are invested in. We do not invest in hedge funds or alternatives that are like black boxes, where we don’t know what’s inside. This transparency should enable you to invest with greater confidence.

Although the US stock market has returned about 10% a year on average, returns for individual companies and individual years can vary wildly. It’s always important to look at the big picture. A huge win on an investment bet today doesn’t mean much if you lose it tomorrow.

We spend a lot of time talking with our clients. We educate our clients about our philosophy and how markets work. If you are retired or withdrawing from your portfolio, we work with you to develop a withdraw strategy that meets your goals. We want you to realize there will be down markets, as they occur every 3-5 years, on average. We want you to be prepared to handle these periods, so you can stick to your long-term financial plan. We want you to be able to stay in the markets. Investing is a lifelong journey.

Having a philosophy that we believe in enables us to be more disciplined and helps you to adhere to your financial plan. We are fee-only financial advisors. This enables us to be independent and always act in your best interest.

If you have an investment philosophy you can understand and stick with, you can focus on activities within your control. You can remain diversified, minimize your fees and costs, and determine your savings rate (or withdraw plan), as well as your long-term asset allocation plan.

We hope that sticking with our philosophy helps you to feel comfortable and secure.

Talk to us. We want to listen. We want to assist you, your family members and friends.

Looking forward and backwards

Blog post #478

We often find things when and where we least expect to.

This past weekend, I attended a Bar Mitzvah ceremony for my cousin’s son.  I was one of less than 20 people who were physically in attendance.  Instead of hundreds gathering, it was mostly virtual.

Prior to the service, I read a few pages of quotes at the beginning of the prayer book. Two of them particularly resonated with me. While these are not directly related to financial or investment matters, each could be relevant to your financial well-being and your financial future.

Life is a continual process of getting used to the unexpected.

~Unknown

We know that the future is unknown and unpredictable. Change and unexpected events are part of our personal lives, as well as in financial markets. The world keeps changing. You must make decisions all the time. Some are big and important, some are small. Change is constant. We can help you deal with change and the unexpected.

Our firm’s investment and financial planning philosophies are rooted in accepting that we can’t accurately predict the future. We recognize that market timing and individual stock picking are not the best strategy for the core of your long-term portfolio, to enable you to reach your goals.

We plan and develop strategies, such as how much risk you need to take, that are not dependent on our ability to predict the future.  These should help you to get used to the unexpected things that occur in your life, as well as in the world and the financial markets.

Life can only be understood by looking backward.

But life must be lived by looking forward.

~ Menachem Mendel, 1800s Rabbi

This is logical and simple. Financial decisions must be made looking forward, but as this and the first quote tell us, we don’t know what the future will look like.

We don’t know what interest rates or inflation will be. We don’t know what broad stock market returns will be over the next 1, 3, 5 or 10 years.

We do know that we can learn a lot by what has happened historically and financially in the past.  We can use the past, which we study and try to understand, to provide you with advice and recommendations for the future.

  • We use historical financial data to help us develop financial strategies. We look to the past, to help us plan for your future.
    • Financial history shows that broadly diversified, global portfolios have outperformed the S&P 500 (US large companies) over the long-term. Thus, we recommend broadly diversified portfolios to our clients.
    • Financial data tells us that mutual funds and ETFs with much lower than average expense ratios outperform those with much higher internal expenses. Thus, we use less expensive investments when possible.
    • We know that interest rates are near historic lows, so you should be refinancing any debts that you have.
  • We know that risk and return are related, so we try not to take excess risk with fixed income investments, as these are the “safe” foundations of your portfolio.

We strive to provide you guidance and advice that will be timeless, that will be effective for years into the future. We don’t advocate fads. We stress diversification

A diversified portfolio may not be exciting at times, but it should help you reach and maintain your goals.

Talk to us. We want to listen. We want to assist you, your family members and friends.

 

Lifetime advice

Blog post #477

The advice is simple. Living it is much harder.

You should remain invested in the stock market for the long-term, regardless of what is happening in the world, in a diversified manner, at a level that is consistent with your need, ability and willingness to take risk.

This means you should not get out of the stock market in a significant manner or go mostly to cash, no matter what is happening in the stock market, economy, politics or other factors.

This means that if you are in the accumulation phase, when you have money to invest and have a long-term time perspective, you should keep investing in stocks on a regular basis, irrespective of what else is going on. This is what we do.

In general, you should only change your stock allocation when your financial or life circumstances change. This means that your stock allocation will likely change as your wealth grows and as you get older, but not due to external factors.

Why are we writing this? Because regularly investing in the stock market and sticking to your stock allocation, through good and bad, is some of the most important advice we can convey to you as financial advisors.

Some people struggle with these concepts. They may get very nervous during a downturn and want to go to cash. Others are hesitant to invest in the stock market now or at other times because they think the market is “overvalued,” at a peak, or for some other reason (like a “potential” oncoming recession or the fear of higher future taxes).

We feel you need to have a guiding set of investment principles and stick to them. For our firm, remaining invested according to your long-term plan is one of these core principles.

But sometimes, should we make an exception to our own core principles?

Last year was one of those times when we challenged our long-held belief. When the pandemic began and started spreading outside of China during January and early February, I became increasingly concerned about Covid. I began questioning if this was a time to sell or reduce client stock allocations. As Covid started spreading in the US in late February 2020, Keith and I talked about this extensively, for hours, over many days.

Was the onset of Covid a reason to try to time the markets? After much consideration, we determined that there was no way that we could time the markets successfully, as you need to determine when to sell (February 2020) AND be able to determine when to buy back into the markets. We had no way to rationally figure out when to buy back into the market. We knew this downturn was different than most prior downturns, but we also knew that most prior major downturns seemed unexpected and unique at that time. We decided to adhere to our core philosophy and recommended that clients remain invested.

  • In hindsight, we made the correct decision by staying in the markets. Instead of selling in February/March 2020, we recommended that clients should gradually begin buying stocks after the markets had dropped significantly.

We knew from past financial history that markets generally rebound way before “the all-clear signal” is readily visible. Stock markets tend to be very forward thinking. By the time it eventually seems “safe” to get back into the markets, the markets have usually already advanced much higher from their bottom.

This is exactly what occurred in late March, which was the approximate bottom for the S&P 500. The stock market rebound began when lockdowns in the US were just starting and Covid had not even reached its worse impact, medically or economically. We made the proper decision not to temporarily get out of stocks due to the Covid pandemic, as US and global markets have strongly rebounded since March 2020, to higher levels few would have predicted a year ago.

To be a better investor, you should try to understand the following concepts:

  • No one is consistently able to accurately predict the future of the stock market. Market timing does not work.
  • The long-term path of the stock markets, US and globally, are upwards.
  • Declines in the stock market are temporary. The long-term historical path for the stock market since the 1920s has been upwards, with declines along the way that have been temporary. We do not see any change in that long-term pattern.
  • Peaks in the stock market are temporary, as they are exceeded by higher highs. This means that at some point in the future, the highs of today will be replaced by higher levels.

So you are prepared in advance, we want to remind you what normal declines are in the stock market when you own a broadly diversified portfolio.

  • It is normal for stock markets to decline at least 10% during almost every calendar year, from top to bottom, at least once during a year.
  • It is normal that stocks will drop a lot, like 20%-30%-40%, or more, every 3-5 years.

Addressing these issues of market timing and continuing to invest on a regular basis are some of the most important services that we can provide in our relationship with you.

  • If these are concerns or issues for you, we would be pleased to discuss this with you. We can listen to each other and work through your concerns, so we can determine an appropriate stock allocation for you and your family for the long-term. That stock allocation should enable you to have the ability to remain invested and learn to get more comfortable, so that your money can work for you and to help you reach your life and financial goals.

We want to work with you to develop a financial plan that includes an asset allocation to stocks that you can live with, when markets are rising and when they are dropping. That is how you can be a more successful long-term investor.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019

Why do we……?

Blog post #476

While many of you have been clients for well over a decade, some of you are newer to WWM and our investment philosophy. We want to help you to have the best chance to reach your financial goals. We hope this post provides you with a summary of why we adhere to certain philosophies and practices.

Why do we use mutual funds and ETFs, rather than individual stocks?

To provide you with the best chance for financial success, we believe it is better to own diversified mutual funds (or ETFs, exchange traded funds, which are used interchangeably in this post), and not a portfolio of individual stocks. Investing in only a few companies is much riskier, in general, than investing in the markets as a whole. It is also difficult to pick which stocks will outperform the market over the long-term. We believe that it is very difficult to identify successfully, in advance and consistently over a long period of time, which individual stocks will outperform the markets.

We strongly believe that investors should be well diversified in many respects (by size of companies, by industry sector and geographically), which mutual funds and ETFs can provide. For most of our clients the core of your portfolio should be in mutual funds or ETFs, even if you want to invest in a handful of individual stocks as well.

Why do we use “passive” stock strategies and not “active” managers? And what about index funds?

There are huge amounts of academic and financial data that show money managers who “actively” try to pick and choose stocks to buy and sell generally underperform their asset class peers over short- and long-term periods of time. These “active” funds tend to be much more expensive, which is a hard hurdle to overcome. They trade more, which adds to expenses and causes more taxes, compared to a buy and hold approach. See these past blog posts, 10 Things You Should Know and 10 (or more) Things You Should Know, where we provide more details on how few active managers have been able to outperform their respective benchmarks.

Thus, when developing a strategy to strive for long-term financial success, we follow the data that “passive” money managers generally outperform “active” managers. It is very difficult to identify successfully, in advance and consistently over a long period of time, which money managers and mutual funds will outperform. Active managers may have some hot years of outperformance, but very few consistently outperform their peers or benchmarks over long time periods, such as 5 or 10 years or more.

The funds we utilize are similar to index funds but different. Index funds must track a specific index and they have little flexibility. A passive approach allows for the diversification and buy and hold benefits of indexing, with additional flexibility, such as not being strictly tied to an index. For example, if an index fund had owned Gamestop in the past few weeks, the index fund would not have been able to sell, as they need to hold the stocks in the index they track. A passive fund would have the flexibility to sell Gamestop, as they don’t have to strictly adhere to a specific index.

Why do we believe in utilizing so many different asset classes?

We make many of our investment decisions based on historical academic data and investment research, along with our own investment experience. We recognize that no one can accurately predict which type of stocks (asset classes) will outperform another asset class over the long-term.

To structure a portfolio to reach your goals, whether your goal is to grow your portfolio or to be able to feel secure and maintain your lifestyle, we apply these concepts. We want your portfolio to be very diversified, as that reduces individual stock risk. Being diversified does not eliminate the risk of investing in stocks, but it reduces the likelihood of incurring huge mistakes that are hard to overcome.

Financial research shows that the following applies, over varying long-term time periods, some back to 1926:**

  • Small stocks outperform large company stocks, both in the US and Internationally
  • Value stocks outperform growth stocks, both in the US and Internationally
  • International stocks and Emerging markets stocks (of undeveloped countries) have outperformed US Large Caps during many time periods.

We tilt most portfolios toward these factors, while remaining broadly diversified. While this data may be true over long-term periods, say over 10 years or more, it does not mean these trends (“factors”) will apply all the time or every year.

What this means to you is that we do not invest in only the S&P 500, as other asset classes have outperformed the S&P 500 over long periods of time. Financial research shows that a broadly diversified portfolio should do better over the long-term than owning just the S&P 500, so we do that.

Why do we believe in global diversification?

We recommend investing globally for the same reasons. Financial research shows that over the long-term, a broadly diversified portfolio, which includes US and International stocks, as well as large and small company stocks, with both value and growth, has outperformed owning just the S&P 500.

For example, from the period 2000 – 2010, a globally diversified portfolio would have far outperformed the S&P 500, as that index did poorly for those 10 years, while many other asset classes did quite well. In recent years, the opposite has been true, as the S&P 500 has outperformed International stocks. But as the world is constantly changing, no one can know what sectors or regions will do best over the next 5-10+ years.

Thus, we recommend some International exposure for most clients.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

 

** Source: DFA 2020 Matrix book, with data through 12/31/19, as well as other information.

Market Update – January 2021

Blog post #475

As 2021 begins, the US and the world are very different than they were a year ago.

Financial markets continuously change in response to new information and unexpected events. Stock and fixed income prices move on earnings and future expectations.

What are we seeing and what are we doing?

The way that we manage your investments and strive to help you reach your financial goals are consistent and disciplined, with the flexibility to change as needed.

As uncertainty always exists, we recognize that no one, including us, can accurately and consistently predict the future. For example, no one could have predicted Covid in December 2019. Even if someone had predicted the Covid pandemic, we doubt that they could have predicted and accurately timed the rebound and strong gains in nearly all asset classes since the onset of Covid. Similarly, we cannot predict the continued impact of Covid, how successful/fast the vaccination process will be, or the impact of new Covid strains.

We remain committed to key investment principles, such as broad diversification across many asset classes, utilizing investments with very low costs, and active tax management (as applicable). These are all things that we can control and should benefit our clients.

Stock update:

Asset classes that are performing well so far in January 2021 are many of the same asset classes that performed well late in 2020 (see index definitions below). Over recent months, many asset classes are outperforming US Large stocks, as defined by the S&P 500, which is a reversal of US Large stocks outperforming most other asset classes during recent years. For illustrative and informational purposes, below are selected asset classes and return data for their respective indices that we recommend to clients:

Consider the significant gains in the sample of asset classes provided above, which have occurred since November 1. If we recommended getting out of the market or significantly reducing your stock exposure before the election, or shortly after the election, when many political changes became more likely, you may have missed out on these gains. This is why we encourage you to adhere to your asset allocation plan and focus on the longer-term, not on political proposals.

We do not make investment policy decisions based on political matters, such as potential tax increases or the size of the Federal deficit.  Financial markets, which include the stock and bond/credit markets, very quickly incorporate all known information into prices and valuations. The financial markets clearly know about the potential for personal income tax increases on high-income taxpayers and corporate tax increases, even though no one knows what proposals will become enacted or when they will be effective.

We will provide our clients with advice about these tax and other changes, as they affect each person or family. However, we do not recommend basing your long-term investment strategy on political matters, as the stock market has done well under both Republican and Democratic Presidents. There are so many other factors that impact the direction of stocks beyond just who is in the White House or what party controls Congress.

Given the significant gains in many asset classes since last March, and particularly in recent months, we are reviewing client portfolios for rebalancing (selling some stocks) for those clients whose stock allocations have exceeded their IPS (Investment Policy Statement) stock targets. This is the disciplined implementation of buying low (which we encouraged you to do starting last spring) and selling high, after significant stock increases.

We also want to remind you that stocks have increased almost straight up since early November. There has not been a significant decline in the markets (of 10% or more) since the major decline last February-March. We are not predicting a near-term decline but reminding you that 5-10% declines are normal. They frequently occur when you least expect them. You must always be emotionally prepared for these types of pullbacks, which are temporary, not permanent, and a part of investing in stocks.

We hope that information like this is helpful for you to adhere to your asset allocation plan, despite whatever uncertainty and changes are occurring in the world.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

 

*Indices used for the above asset classes are:
US Large stocks: S&P 500
US Large Value stocks: Russell 1000 Value
US Small Cap stocks: Russell 2000
US Small Cap Value: Russell 2000 Value
International stocks: MSCI EAFE NR USD
International Value: MSCI ACWI ex USA Value
Emerging Markets: MSCI EM NR USD
Disclosure: This data is provided for illustrative purposes only and do not represent actual mutual funds or ETFs, or actual client portfolios. We recommend more asset classes to clients than is provided above. These indices represent asset classes, which do not have fees. The actual mutual funds or ETFs would have internal expense ratios, which would reduce the returns provided above. These figures also do not include the deduction of WWM advisory fees.