The New World-Part 2

Blog post #437

As I write this Wednesday evening and early Thursday, global stock markets have had 2 very good days in row, and Thursday is starting out well.

I want to be positive and optimistic, as that is my nature, but I think we are far from out of the woods yet. The patient (unfortunately, far too many real patients, as well as the US and global economies) are still on life support.

Just to be clear….my first concern is for everyone’s health. But as a financial advisor, and not a scientist or medical professional, these thoughts are only about the financial implication of the crisis we are now in. All of us.

The strong stock market this week was due to the positive news that the US Congress and President are “close” to reaching an agreement on the largest fiscal stimulus / bridge loan / corporate financing package in the history of the world. They have been close to getting this done for days, but as of my writing, the Senate, but not the House, has passed the legislation and the President still has not signed it.

Note to clients….when the final legislation is enacted, we will send out an update. Our back- office firm’s national Direction of Education (tax and financial planning expert) sent out 56 tweet thread late last night….we are on this!)

This legislation is vital and necessary, along with the strong action and quick responsiveness by the Federal Reserve to keep the financial markets flowing well, especially the corporate and municipal bond markets.

Ever heard the saying “progress not perfection?” This is the case. The legislation and Federal Reserve actions are to save the US economy and to try avoiding an economic calamity….not all the details matter…preventing an economic catastrophe during or after the health crisis is what matters. These programs are intended to provide various forms of liquidity, or bridge loans/financing, so as many people and businesses can remain afloat through the health crisis.

Without these actions and programs, companies large and small, as well as individuals and small businesses, could face horrible liquidity and financial problems.

Let’s be realistic. This may not be the bottom for the stock market. We just don’t know.

  • Historical financial data teaches us that when markets begin to be very volatile, they tend stay volatile for a while.
  • This is important information that you need to understand, internalize and get used to. 

With this much uncertainty….and there is a lot of it, markets will likely continue to be very volatile for a while. We have planned for this. We are acting accordingly, on your behalf. You need to continue to be mentally prepared for the possibility of worse health and financial news, and stock market declines, especially if the health news worsens or does not get better within the next month or so.

This is just a guess, but I don’t think this will be the final major legislation that will be necessary before this crisis is over. There were many programs and legislative acts during the 2008-09 crisis. This legislation and Federal Reserve liquidity steps are already way larger than all the 2008-09 actions, by multiple times (per CNBC this morning). The markets were wanting good news this week and traded higher on it. That’s how markets function. Financial markets react quickly to news, good or bad, as we have clearly seen in recent weeks.

We just want you to be realistic and prepared for either outcome, good or bad. And this is the basis of our investment strategy right now.

  • We can’t predict the timing of any of this, which is why we are recommending to gradually rebalance, to gradually buy stocks at these levels.
  • We know it makes sense to follow the discipline of buying low and selling high… and we will continue to do that, but with caution, for most clients.

What the world is experiencing is far from normal. It has affected our everyday lives in many ways. Companies and health professionals are innovating. Ford will be producing ventilators. I read last night that anesthesiology machines may be able to be converted to ventilators with a simple change in parts, which could provide tens of thousands of ventilators very quickly. Solutions will be found. Hopefully those with knowledge and expertise in many areas (medicine, leadership, technology, supply chain, manufacturing, etc.) will adapt, be creative and resilient.

But in terms of the stock market, this is normal. Yes, fortunately and unfortunately.

  • Stock markets annually go down temporarily (peak to bottom) on average about (14%) most years.
  • And one in every 5 years or so, stocks temporarily go down much more, sometimes 20% – 30%, or way more, which is called a “bear market.”

Since the end of World War II, in 1945, there have been 16 bear markets in the S&P 500, which I am defining for this purpose as declines of around 20% or more (there were a few that were almost 20%, so I’m counting those…a temporary loss of 19.5% feels almost like a temporary loss of 20%, right?).

That is an average of 1 bear market every 4.7 years, which is around the long-term average.

But this is the key…and thank you for those of you who are still reading…

The bottom point of the S&P 500 at the end of some recent bear markets….

Do you see the clear long-term trend? The losses are temporary on the long upward trend of our society. Stocks have far outperformed cash, or other types of fixed income, over the long term. Stocks have provided more than 7% annually over the long-term inflation rate.

With rewards, comes risk. Keep the faith. Buckle in for more volatility. And stay healthy and  safe!!

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

 

 

Note: The S & P 500 Index is an index of companies, of which the companies in the Index has changed dramatically over the years. It is composed of 500 of the largest publicly held companies in the US. Our firm believes in global diversification as well as holding small and medium sized companies, both in the US and Internationally. Using the S & P 500 Index is for educational and illustrative purposes, and the trends explained above are generally representative of global stocks.

Responding to a New World

Blog post #436

The world financial markets have been crushed by the Covid-19 outbreak.

But we are here for you and working hard, taking actions, thinking about the future and relying on rational thinking.

As I write this Wednesday night and Thursday morning, I will try to explain a few things and tell you what we have been doing and how we are proceeding, on behalf of our clients.

We are not panicking. We have all been calm, rational and dealing with this day by day….talking, planning, coordinating and communicating with each other and with you, our clients. Please contact us if you need to talk to us. That is what we are here for.

We have been through financial crises and other large market declines before, and we will have to deal with other crises again in the future. This time feels very different, because of its health-related cause. But every past and future problem that becomes a financial crisis just starts with a different event. This time will not be different….we will recover.

The health concerns and reality may worsen before they get better. The personal, economic and stock market toll may continue to worsen, as well, before they improve. Positive signs are out there, as it seems like federal, state and health leaders, as well as the corporate community, have realized the seriousness of the situation, and creativity and leadership are becoming more effective. Examples are that drug testing and medical solutions are occurring at a more rapid pace, and companies in the auto industry may begin to produce much needed ventilators.

Be safe.  Be healthy. Be responsible for yourself and your family.

We have been doing tax loss selling and will continue to do so, as warranted. As discussed last week, this will save you money in the future, when taxable dividends or capital gains are recognized, and they will be offset by the tax losses that we are recognizing very aggressively right now. These are important actions that will save you real money in the future.

We are beginning to purchase stocks, in a gradual and disciplined manner, in accordance with your Investment Policy Statement (IPS) asset allocations. We are beginning to rebalance client accounts, and will be reaching out to you, regarding these steps. We talk about this discipline with every client, before we start to invest for you. We don’t know where the bottom will be, so we do not plan to rebalance client accounts all at once, unless someone wants to, at this time. We will most likely do this in a gradual, disciplined and unemotional manner, over a period that will be based on future market movements.

In the long term, it is best to buy stocks when others are scared. We can’t predict the bottom. We may be far from the bottom. But we know that stocks are much cheaper than they were a month ago. If you believe that we will survive and recover, then history teaches us to gradually start buying at times like this.

If you have excess cash, consider a gradual program of purchasing. If you participate in a work related 401(k) or similar retirement plan, you should consider accelerating your funding, as long as you have ample cash reserves.

We have reviewed the fixed income holdings of our client accounts. This is one area that this crisis is very different than past ones, as most businesses are facing almost a complete loss of revenue for future weeks or months. Strong government and Treasury Department action will be needed to provide bridge funding for many large corporations. Similar creative vehicles will be needed to be established for small and medium sized businesses. At the time of purchase, all fixed income securities were investment grade, as well as FDIC guaranteed CD’S, government and municipal bonds. We are carefully monitoring these. We have strict diversification guidelines in place, which we have again reviewed, to ensure that each client only holds a very small amount, generally not more than 1-2%, of any one issuer. While it is possible that some bonds may be sold prior to maturity, due to economic stress or difficulties, we are being conservative and pro-active in our actions. We do not purchase any junk or below investment grade securities, if they are not investment grade at the time of purchase.

We do not invest in funds or products that limit liquidity in advance. Some investment managers utilize funds that restrict when you can sell or get out of an investment. We have never recommended these types of products. While we cannot guarantee that every security will be able to be sold in a distress-type situation, we have designed your portfolio to be able to be as liquid as possible, within the investment objectives that were agreed upon.

We have reviewed all our client accounts who regularly withdraw funds, to ensure that there is adequate money (at least 6 months of withdrawals) in money market funds. This has been a cash management practice, to maintain ample cash reserves, so we are not forced to sell, for regular withdrawals. We reviewed these types of accounts again in the past week, to ensure that we have taken the appropriate steps so you will have adequate liquidity, as desired.

Make sure you have ample, or extra, cash on hand….either in your bank account or in the fixed income portion of your accounts with us. If you are not sure, contact us. This is very important during times of uncertainty.

Diversification is working, even though you may not realize it. Yes, the stock funds that we invest in are down significantly. However, there are other investment styles that may be facing much greater losses, which were preventable and controllable. For example, if you had loaded up on dividend paying energy stocks or certain other stocks, your losses over the past years would be huge and more than double the decline of the S&P 500 this year alone. Energy stocks such as Exxon-Mobil, Enterprise Products Partners and Chevron are down 60-70% over past years, and Boeing is down almost 80%. This is why we believe in diversification and do not recommend owning individual stocks for the majority of your investments.

What you should NOT be doing:

  • Do NOT invest short-term money into the market.
  • Do NOT take more risk than you can stomach or handle, for your long-term financial plan.
  • Do NOT borrow money or invest on margin.
  • In general, do NOT prepay very low interest rate loans, especially if you are concerned about your job, income or cash reserves. In the longer term, we will review these issues with you individually, based on what happens with interest rates.

We have a disciplined philosophy and one that we are confident in. We are adhering to our long-term plans and reviewing what we think needs to be modified. We encourage you to do the same. We know that it is not always easy, but those who can be resilient and patient will get through this.

We made it through 2008-09. We are doing our best to help you make it through this crisis.

Again, please contact us by phone or email if you want to reach us. 

Please do what you need to….. to be healthy, both mentally and physically.

 

Dealing with this situation

Blog post #435

 

The world has changed significantly, which has affected health concerns and investors’ finances.

What has happened?

The coronavirus outbreak was the first negative to impact global, then US stock markets, in past weeks.

On Monday, US and International stock markets were dramatically impacted by the unprecedented steps taken over the weekend by Saudi Arabia, to both increase oil production and reduce the price they charge for oil. These actions, along with the already reduced global demand for oil due to the coronavirus, caused the price per barrel of oil to plummet from $63 per barrel at the beginning of 2020 to around $33 at mid-week.

As this week has progressed, stock markets continued declining sharply as the reality of the Covid-19 outbreak and the lifestyle changes that will be required, have taken hold.  The economy will slow dramatically and many economic sectors will be greatly impacted.

Interest rates, which were already at historic lows, have fallen even further. Credit markets are concerned about weakening economies, companies that may have difficulties due to lack of demand due to coronavirus, as well as energy companies and their lenders, due to the huge decrease in oil prices.

What do we think going forward?

Clearly the world has changed significantly over the past few months, and even over the past week.

We do not know when financial markets will stop failing, when the coronavirus outbreak will be contained or mitigated, or when oil prices will return to rationale levels.

What we do know is that we must focus on key things…such as what we can control and what matters to each of us.  I will be blunt, the health issues are very concerning. I have tried to keep this mantra in mind, as I try to focus on what we can control, and not control. Our everyday lives are going to be disrupted for a period of time…and none of us know for how long. The health issues have now been compounded with financial concerns, due to the drop in stock values. Hopefully, our federal, state and local leaders, both medical and political, as well as those leaders across the globe, take serious, appropriate and necessary actions in the immediate future.

In terms of your portfolio, the pain of losing money is not pleasant for anyone. I am invested in similar or identical stock funds and fixed income securities as our clients, so my family has lost money in stocks and been cushioned by fixed income, just like you have.

To be a successful long term investor requires resiliency, which nearly every client we have has shown over the past weeks.  The coming weeks and months may continue to be very challenging. To reap the long-term rewards of the stock market, you need to remain invested during both good and bad markets.  No matter how difficult, this will be temporary.  There will be medical solutions and an economic recovery from this health outbreak.

When we meet with clients at or near retirement age, we frequently discuss their allocation to fixed income and their withdrawal rate. We remind them that their fixed income assets should last them for many years, and in many cases, for 10 or more years.  We call this your foundation. This means that if you can live off of your fixed income assets for a long time, you have a strong foundation and you don’t need to be as worried about what the stock market is doing today, or even over the next few years.

The reality of living through a sharp and scary decline like we are experiencing can still be difficult, so let’s go through the scenario and then some history. These are important concepts.

For example, if someone has a $3 million portfolio and is allocated 50% to stocks and 50% to fixed income, they would have $1.5 million of fixed income investments. If this hypothetical client was withdrawing $150,000 per year from this portfolio, that is a 5% withdrawal rate. That is realistic. The $150,000 per year is 10 years of their fixed income assets ($150,000 / year x 10 years), not including any interest earned on the fixed income. Thus, they don’t need to actually use the stock market investments for at least 10 years. There will be time for the stock investments to recover from periods of decline, such as we are incurring now. This is the type of portfolio and mentality that we want to develop with all of our clients.

If you are younger, and in the accumulation and savings phase of your life, you should continue to invest and save for the long term.  You should want to buy when others are scared and are selling. Keep adding to your retirement and regular savings plan. Make contributions now, for retirement plan contributions that may be due later in 2020 or even 2021.

We don’t know when global stock markets will recover, but we are confident that they will. We are quite confident that 3-5-10+ years from now, diversified holdings of global stock markets will be higher than they are today.

Some facts and history….

Since 1979, the US Russell 3000 Index (the 3,000 largest US traded companies) has averaged about a 14% decline at some point during each year (called an “intra-year” decline). While we invest in a globally diversified portfolio and the 2020 intra-year decline has now far exceeded 14%, this data is still instructive.

  • About half of the years since 1979 have had declines of more than 10%.
  • About 1/3 of the years had declines of more than 15%. (Significant declines are not fun, but more normal than most of us realize).
  • However, calendar year returns were positive for 34 of the 41 past years.**

This shows that intra-year declines are normal, but positive years and recoveries are even more the norm. While the cause for the steep decline is different this time, as it is health related,  we don’t think the long-term effect will be different….there will be a recovery.  You will need to be patient and are advised to adhere to your asset allocation plan.

From July, 1926 until December 2019, for almost 100 years, the broad US stock market has returned around 9.6% per year, before fees and trading costs. Obviously, there has been great year-to-year variability (many up and down years) to reach that 9.6% per year average.

As the chart below shows, after declines of 10%, 15% and 20%, the broad US stock market (comparable to the Russell 3000 Index) has generally performed better than average in the 1, 3 and 5 year periods following such declines. Stocks generally show strong returns after steep declines.*** This is the reward for the risk and volatility you need to endure.

What are we doing and recommending?

Most importantly, we are here for you, if you want to talk to us. Please call or email us. We know this is a difficult time, and may likely continue to be, especially with both health and financial concerns.

To save you future taxes where possible, we have placed trades all week to recognize tax losses, especially for newer clients and those that have added money to their accounts this year and in recent years, depending on the specific investment. We are not waiting until later in the year or until year end to do this. We aggressively monitor your taxable accounts for these opportunities…..providing a silver lining to the market turbulence, whenever possible.

We will be reviewing client accounts for stock purchasing opportunities, by rebalancing or if you add new money to your investments. For the long term, the coming weeks and months offer times to buy. We can never know when the market bottom will be. But just as investments were very profitable for those that had the courage to buy during the declines of 2008-09, we expect those that buy over the coming days and weeks will be rewarded in the long term. We call this rebalancing, as your fixed income allocation has increased and your stock allocation has decreased in the past month, we would recommend to sell fixed income and buy stocks.

As interest rates have dropped, if you have a mortgage that is above 4-4.5% and you plan to stay in that home for at least 3-5 years, you should consider refinancing. If you want to discuss this with us, please contact us.

If other tax or financial changes are enacted in response to this situation, we will update you on those as they occur.

We are prepared to work remotely, if that is recommended or required. If that becomes a reality, we will provide clients with the necessary contact information. We have procedures in place and each member of our firm has worked and done business remotely many times in the past, within a secure technological environment. We have also discussed these scenarios with our business partners and are confident that we can function property and be able to provide you with excellent service, remotely.

We hope each of you and your families stay in good health.

Sources:

** Recent Market Volatility, Dimensional Fund Advisor’s, Issue Brief, March 4, 2020.

***US Equity Returns Following Sharp Downturns, Dimensional Fund Advisors, March 9, 2020.

Coronavirus: Update 2

Blog post #433

Since we first wrote about the coronavirus two weeks ago, the virus has spread to more countries including the US, and global stock markets have declined significantly this week.

However, even with the declines of the past week, clients should remember that your fixed income allocations have increased in value (as interest rates have declined) and provide a strong foundation of stability for your portfolio and any near term cash needs.

Talk to us if you have concerns: We want to emphasize that if you have specific financial concerns or want to discuss the impact of this situation to your portfolio or financial future, please contact us.

While we stress a long-term approach to investing, if you have short-term concerns, now is the time to talk to us about that. That is what we are here for.

Keeping things in perspective: please remember that point drops in stock market indices can sound much worse than the percentage changes. As we wrote about a few weeks ago, a 1,000 point decline in the Dow Jones Industrial Average (DJIA) may sound worse than a 3-4% decline.

The future? We cannot make any predictions or forecasts of what the future will hold or what the full impact of the coronavirus will be. As global health officials are not able to do this, we certainly cannot anticipate what will occur in the coming weeks or months.

There are a wide range of possible impacts and outcomes. It is very possible that the short term (the next 3-6 months) financial impact to companies and stocks may be far greater than the actual health issues or number of deaths caused by the coronavirus.

It is possible that the the spread of the coronavirus to the US and other parts of the world will cause much greater disruptions to supply chains and every day lives and economic activity than was generally anticipated only a week or two ago. If this were to be the case, then it is possible that US and global stock markets may decline much further in the near term. There is no way to know this.

However, we think this issue is quite different than what occurred in 2008-2009, as that was a material economic decline that took years to recover from. If government and health officials act efficiently and pharmaceutical companies are able to promptly develop vaccines and other treatments, the coronavirus should not be a long lasting disruption to consumers, countries and companies…..and stock markets would likely bounce back before the coronavirus matter is fully resolved.

We do not recommend making any specific investment changes due to the coronavirus outbreak. As we have discussed in the past, to try to “trade” or “time the market” based on a specific event, you must be correct in your timing…twice. As markets react to news and information so quickly, as well as rumors, this is not likely to be a successful strategy.

While it is very possible that global stock markets may continue to incur losses and be much more volatile due to the coronavirus in the short term, we feel a strategy of adhering to your long-term investment plan and asset allocation makes the most sense.

Stock prices are most directly impacted by current and future earnings. Companies based in the US and globally will be impacted, but to varying degrees. Most companies thus far have not determined what the financial impact will be and very few companies have released specific statements or changed their future earnings guidance. We presume that many more companies will be announcing reduced short-term earnings guidance in the coming weeks or months, which is what prompted part of the market sell-offs this week.

We want our clients to know that they have very little direct exposure to companies that are actually based in China. For example, if you have a 60/40% stock/fixed income allocation, Chinese-based companies account for approximately 2-3% of the globally diversified portfolio that we recommend.

However, it is important to note that the impact of the coronavirus now appears to be impacting globally beyond Chinese companies or those that have historically relied upon Chinese consumers, Chinese tourism and spending for a significant part of their revenue and profits. The virus may lead to consumer and supply chain disruption issues on a global basis.

There may be further short-term declines, which could be significant, and stock market swings based on health reports, either positive or negative, due to the coronavirus. Volatility may continue to increase if the coronavirus outbreak persists in China, continues to spread in a more significant manner to other parts of the world, and if the real or perceived impact affects every day lives in the US.

Interest rates have continued to drop in the US, due to the coronavirus. This has created another opportunity for mortgage refinancing, or low rates if you are looking to purchase a house, as mortgage rates for 15 and 30 years are extremely low.

The price of oil and some other commodities have dropped significantly due to the reduced demand, because of the major shutdowns occurring in China and reduced economic activity elsewhere.

We again encourage you to talk to us if you have concerns about these current conditions.

If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

Investing implications of Coronavirus outbreak

Blog post #431

As of now, the coronavirus has not had a material impact on the investments of our clients.

US and global stock markets have generally been quite resilient and have held up well so far, despite the ongoing health issues, which have led to various consequences in China and are impacting other parts of the world.

We cannot make any predictions or forecasts of what the future will hold or what the full impact of the coronavirus will be. As global health officials are not able to do this, we certainly cannot anticipate what will occur in the coming weeks or months.

We do not recommend making any specific investment changes due to the coronavirus outbreak. As we have discussed in the past, to try to “trade” or “time the market” based on a specific event, you must be correct in your timing…twice. As markets react to news and information so quickly, as well as rumors, this is not likely to be a successful strategy.

While it is very possible that global stock markets may incur losses or more volatility due to the coronavirus, we feel a strategy of adhering to your long-term investment plan and asset allocation makes the most sense.

Companies based in the US and globally will be impacted, but to varying degrees. Companies are not able to anticipate or determine what the impact will be, or very few companies have released specific statements or changed their earnings guidance. It is likely that some firms, and their stocks, could be affected, such as companies that have major businesses in China (such as Starbucks and luxury retailers), companies that rely on travel to or from China (such as certain airlines, hotels, luxury retailers and the gaming industry), or companies based in China or that rely on China for the manufacturing and supply of products (Apple, for example).

We want our clients to know that they have very little direct exposure to companies that are actually based in China. For example, if you have a 60/40% stock/fixed income allocation, Chinese-based companies account for approximately 2-3% of the globally diversified portfolio that we recommend.

However, it is important to note that the impact of the coronavirus may globally extend beyond companies that have historically relied upon Chinese consumers, Chinese tourism and spending for a significant part of their revenue and profits. The virus may lead to issues for companies on a global basis that rely on Chinese companies as part of their supply chain. These companies would be held throughout a typical portfolio and the impact cannot be determined.

There may be short-term impacts and stock market swings based on health reports, either positive or negative, due to the coronavirus. Volatility may increase if the coronavirus outbreak persists in China or spreads in a more significant manner to other parts of the world, or the US. The stocks of individual or groups of companies may begin to be impacted more as they are better able to assess and report changes in revenue and future earnings expectations due to the impact of coronavirus on their business.

Interest rates have dropped in the US, due to the coronavirus. This has created another opportunity for mortgage refinancing, or low rates if you are looking to purchase a house, as mortgage rates for 15 and 30 years are extremely low. The price of oil and some other commodities have dropped significantly due to the reduced demand, because of the major shutdowns occurring in China.

We want to emphasize that if you have specific financial concerns or want to discuss the impact of this situation to your portfolio or financial future, please contact us.

While we stress a long-term approach to investing, if you have short term concerns, now is the time to talk to us about that. That is what we are here for.

Dow Nearing 30,000: The Implications

Blog post #429

The Dow Jones Industrial Average (DJIA) is close to the 30,000 mark for the first time in its history, as it exceeded the 29,000 level in mid-January.

This is historic because it represents the continued increase in the worth of large US companies and their respective stocks.

It has taken only 3 years for the DJIA to increase from 20,000 to nearly 30,000, though there is no way to know when it will reach 30,000, as it is now trading below 29,000, as of Wednesday, January 29, 2020. Last week, prior to the reports of the Coronavirus outbreak in China and other parts of the world, the DJIA was above 29,300.

The DJIA first crossed 20,000 on January 25, 2017, a little over 3 years ago. While that is very fast for a 50% rise, from 20,000 to nearly 30,000, the increase was not straight up…there were a few significant, sharp periods of decline in the past three years.

However, it took almost 18 years for the DJIA to double from 10,000 to 20,000, which was a 100% increase. The DJIA first closed over 10,000 in March 1999. It went back and forth 33 times above and below that 10,000 level until August 27, 2010, the last time it was around 10,000. This emphasizes the patience which is needed to reap the rewards of investing in stocks.

While the DJIA and US stocks have risen dramatically since 2017, it is important to remember some of the key factors which cause stock market changes: changes in real earnings and future earnings expectations. Stocks have also been helped over the past decade by continued very low interest rates.

We encourage you to understand the perspective of the DJIA nearing this milestone. The DJIA is composed of only 30 stocks. The DJIA at times may perform similarly to the S&P 500, an index of 500 US based large companies, but these two major indices may perform differently for many reasons.

The DJIA gets a lot of media attention, so it is important for that reason. However, the DJIA is calculated in an old-fashioned manner which is not considered an accurate representation of how investors are really doing.

The DJIA is calculated based on share price, not based on a stock’s market capitalization. This means that an increase or decrease of $1 in the share price of Apple, with a share price of around $325, impacts the DJIA approximately 2 ½ times more than a $1 increase in the price of Proctor & Gamble, which is priced around $126. Thus, stocks with higher share prices affect the DJIA more than the price changes of lower priced stocks, such as GE today.

As the DJIA gets to even higher levels, we want to encourage you to put DJIA “number headlines” in the proper perspective. If the Dow is at 30,000, a 100 point increase or decrease is only a 0.33% change. A 250 point change would be less than 1%, at 0.83%. So even a 250 point increase or decrease is really not that significant.

  • When the Dow was at 10,000, a 250 point daily change was over a 2.5% change.
Please keep actual DJIA point moves in the proper perspective. It is better to think of the changes in percentage terms, which are more relevant.

What do these levels mean to you? With various US major stock indices reaching new highs in January 2020, we want to remind you that we focus on long term global portfolios and your personal investment plan. We recommend a globally diversified portfolio, which includes both US and non-US stocks, with a tilt towards small and value stocks.

We regularly monitor your exposure to stocks and we will rebalance (sell or buy stocks) if your stock allocation increases (or decreases) significantly from your agreed upon stock allocation.

In real terms, if you have a $3 million portfolio with a 60% stock allocation, your stock holdings target would be $1.8 million. If because of stock market increases, your total portfolio grew to $3.4 million with $2.2 million in stocks, your stock allocation would now be 65%, which is more risk than we agreed was necessary for your risk tolerance or to meet your financial goals. We would review and likely sell about $160,000 of stocks, to bring the stock allocation back to 60% (based on tax and other considerations). This is how we are disciplined and rational in our long-term approach to investment management.

Stock market indices nearing new highs gives us confidence in our long term approach to investing, by maintaining consistent and appropriate allocation to stocks.

Talk with us. If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

 

The Value of having an Investment Plan

Blog post #426

If 2018 and 2019 taught investors anything, it is the value of having an investment plan and the importance of adhering to it.

In late 2018, the US and Global stock markets declined significantly, as the S&P 500, which consists of large US based companies, dropped by almost 20%.

What were you thinking then? Did you want to stay in the market or get out? Were you fearful or concerned?

Hopefully, with the advice and counsel of your financial advisor, such as our firm, you decided that it made sense to stay invested in stocks and adhere to your long-term investment plan.

For clients who remained invested, we viewed such a downturn as a buying opportunity and would have purchased stocks in late 2018 or early 2019. Buying stocks when others were selling and when markets look ominous takes discipline. That is one of the values of working with our firm, as we don’t react with emotion, we react with sticking to your long term asset allocation between stocks and fixed income.

By sticking to your plan, by remaining disciplined or allowing us the discretion to be disciplined for you, you were rewarded in 2019 with strong stock performance across asset classes, in the US and Internationally.

Stock markets do not have a memory. Don’t try to time the markets. Don’t try to figure out when to get in and when to get out. It is too hard to consistently be correct – and you need to be accurate twice, trying to time when to get out and when to get back in.

It makes much more sense to develop an investment plan, which we call an Investment Policy Statement (IPS).  An IPS provides for the allocation percentage to stocks that helps you reach your financial goals and the level of risk that you can be comfortable with, which enables you to remain invested during down markets and times of uncertainty (which is really always!).

It may seem easy today to invest or remain invested, after a year of significant gains in a diversified portfolio. But when volatility or an extended down period returns, we hope that you see the value of our advice and guidance.

Providing you with regular and timely information and guidance can help you to be a better long-term investor. Being out of the market for a few key days or during a quick upturn can have a dramatic impact on your long-term finances. As our blog post in November, 2019 showed, Importance of Staying in the Game, missing out on only the top 5 days of the S&P 500 between 1970 and August 2019, over 29 years, reduced the return of $1,000 invested in 1970 from $138,908 to $90,171.

That is incredible and reinforces the importance of remaining invested, regardless of the news, forecasts or other future concerns. There will always be uncertainties to deal with, such as politics, recessions or world turmoil. We will never know the best time to get into or out of the market because we cannot predict the future. That makes sense, as global stock markets offer you greater potential for returns than investments that don’t have as much risk and volatility. As the saying goes, risk and return are related. No risk, no reward.

So what should you do in 2020? These lessons and strategies are the same as we would advise in almost any year.

  • Be a long-term investor in a globally diversified portfolio.
  • Work with an advisor to determine a portfolio and a comprehensive financial plan that makes sense for your financial situation and goals.
  • Accept the market’s inevitable ups and downs, so you can reduce your anxiety about it, when the down times occur. And they will.
  • Stop trying to time the markets.
  • Try not to worry about current events and their potential impact on the markets. You can’t predict what will occur and how it will impact stocks.
  • Instead, focus more on your family, the people and things that you care about and you love to do.

Talk to us. We want to help you with any financial matter that is important to you.

If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

Source: This blog post was inspired by “The Market Has No Memory,” by David Booth, Executive Chairman and Founder of Dimensional Fund Advisors, dated January 3, 2020.

Looking back and forward, Part 2

Blog post #423

As this decade draws to a close in a few weeks, we are providing a series of blog posts of our thoughts and reflections, lessons and guidance.

Last week we discussed how interest rates changed dramatically over the past decade, and in the opposite direction of what most people would have expected to occur in 2010, for the next 10 years.

This week, we will provide some of the traits, philosophies and attitudes that can help you to be more successful, as an investor and for your financial future.

Having a written investment plan. We feel that developing a written document with our clients, that discusses their long term asset allocation plan, as well as the potential of how such an allocation could perform during a significant market decline, is vital to your future success, as it helps you adhere to the plan during down markets.

To be a successful investor, you need to be patient. You need to have the psychological ability, with our assistance if needed, to ride out market declines, to be able to reap the rewards of positive bounce backs. Staying in the market during and after the significant declines of late 2018, and at other times in the past decade, are great examples of this. By staying in the markets in late 2018, this enabled the stock portion of your portfolio to grow during the positive markets of 2019.

Be willing to listen to others and get advice. Due to changes in financial markets, the economy, tax laws and the speed of change in general, we feel that using a financial advisor can help you reach your financial goals. Using an advisor that adheres to a fiduciary standard, as our firm does, so that the advisor’s interest is aligned with your financial interests is important. One aspect of an advisor that adheres to a fiduciary standard is we try to keep your costs minimal, by using very low cost institutional mutual funds. We cannot control many things, but costs are something we and you can control.

Having a consistent investment philosophy that you believe in and can adhere to over the long term, is vital. This philosophy should provide you with a solid chance for financial success. Rather than continuously changing approaches and underlying investment managers, sticking with a consistent, long term philosophy should provide you with confidence and peace of mind. An important aspect of our philosophy is the belief that, for most investors over the long-term, utilizing asset class mutual funds should outperform those who buy and sell individual stocks, as well as active money managers who try to guess which stocks and sectors will do the best in the future.

We believe that for the long term, being broadly and globally diversified is the proper strategy for your stock portfolio. We also believe that having a portfolio tilted towards small and value stocks, as well as including International stocks, should provide you better expected returns and a smoother ride over the long-term.

 

  • We may have the right long-term strategy, but this does not mean this will result in an optimal outcome every year or even for a number of years. You can have a good strategy, and still incur an outcome that is not as good as another strategy over certain time periods. But that does not mean you should change your strategy in a significant manner, unless you have evidence which supports your change, or that your current strategy is no longer valid.
  • To use a sports analogy, if you are going into the Super Bowl and could pick any quarterback, choosing Tom Brady may be the correct strategy. He may not win that one game, but your plan was valid. Over the longer term, he has proven to be a winner. Likewise, in investing, one could develop a sound strategy and recommend investing in a diversified set of asset classes (mutual funds).  If one of those asset class mutual funds underperforms other asset categories for a period of time, this does not mean the strategy was bad.  Patience is likely to prove that in the long term, continuing to hold a currently underperforming asset class to be rewarding in the future.  We just don’t know exactly when.

We think having a positive attitude helps you to be a more successful investor. You should believe in capitalism and that over the long-term, companies will succeed and grow their earnings.

Having realistic expectations of the financial markets is vital. You should know that stocks go down at least 20% in one of every 5 years, on average, since World War II. We want you to be prepared emotionally and financially for such downturns. At the same time, know that stocks go up far more years than they go down. When you are in retirement mode, you should plan to withdrawal 4-5% of your portfolio, which gives you a better chance of not running out of money during your lifetime and be able to maintain your standard of living.

We know that the financial markets and the world are continually changing, and we will change and adopt new strategies, investments and concepts, if they are valid, sound and we expect them to be beneficial to our clients. We are independent. We do not get compensated by mutual funds or other investment providers. We gather information from many sources, but we make our own decisions and recommendations.

We have used the same general investment philosophy since our inception in 2003. We still strongly believe in these major concepts and beliefs. Within that framework, however, we have not been static. We have made changes and modifications over time and will continue to do so, as we feel they should be made, as long as we expect them to be in our client’s best interest.

We cannot predict the future. We do not know what the next decade will bring. We do know that we have a set of philosophies and beliefs, as well as a team of professionals and industry relationships, that you can be confident in.

Talk to us.

Looking back and forward, Part 1

Blog post #422

It seems amazing, but in a little over 3 weeks, this decade ends and a new decade begins.

This is a good time to review, reflect and learn from what has occurred in the past, as well as share some insights about the future.

This is the first of a series of blog posts we plan to write reflecting on various aspects of the past decade and the future.

Ten years ago, the US and the rest of the world were just beginning to come out of “The Great Recession,” which was caused by the US housing bubble and led to the global financial crisis of 2008-09.

One of the major lingering impacts of the Great Recession has been that interest rates and inflation have been at historically low levels over the past decade.

You may think interest rates are low today, but let’s really put this into perspective.

Currently, the 10 year US Treasury Note is now yielding around 1.8%, and has fluctuated between 1.56% – under 2% during the last 3 months.

What do you think the yield was of the 10 year US Treasury Note ten years ago, during January 2010?

Think about this for a minute. The U.S. economy is doing pretty well today. While other parts of the world may not be doing as well, the world economy is certainly not going through anything like the global financial crisis that occurred in 2008-09.

So what do you think the 10 year US Treasury Note was yielding in January, 2010?

Incredibly, the yield 10 years ago much higher than it is today, almost twice as high. The 10 year yield was 3.665% in early January 2010, versus around 1.8% this week.

barchart.com ***

Similarly, mortgage rates were also higher in 2010 than they are now. Mortgage rates were above 5.25% in early 2010, and are now around 3.70%, for a 30 year fixed mortgage. *

While US and global economies have improved significantly over the past 10 years, inflation has been very low and interest rates have dropped. In many other counties, interest rates are actually negative.

What do we think are the causes and thoughts about the future?

Inflation and interest rates are closely correlated. If inflation was higher, or started to increase above 2%, then interest rates would be higher, or at least central banks around the world would raise interest rates to prevent inflation from increasing significantly.

This has not been an issue, as inflation has been so subdued over the past 10 years. One clear cause of this has been the impact of technological changes like fracking on the global oil and energy supply. In previous decades, such as 1973-74, the rise in oil prices caused high inflation and high interest rates. As we have written previously, the technological improvements in oil and natural gas production has put what appears to be a cap on oil price increases. Oil prices have traded in a range since 2015, which has been a key factor in low inflation.

We often say….you should focus on things that matter and things you can control, per the great sketch by Carl Richards. In this case, we cannot control the future of interest rates or inflation. For planning purposes, we assume that interest rates will remain around current levels going forward. Though we would not have assumed these current low interest rates ten years ago for now, there is nothing on the horizon to indicate much higher interest rates will be returning any time soon.

 

Our blog post dated March 17, 2010, Fed Actions: What Does it all Mean, still very much applies today. “As advisors managing fixed income portfolios, we do not make predictions about the direction of interest rates…to attempt to do that is nearly impossible, particularly over a long period of time. We would prefer to build a diversified portfolio of very high quality fixed income securities, of varying maturities, so that we will get the interest rate return of the market, and not risk losing money by betting on the direction interest rate moves.”

We know that is it very difficult to predict or guess the future direction of interest rates.

We are not going to play a loser’s game, or one that would be unnecessarily risky, by trying to place bets on the direction of interest rates with your fixed income allocation.

At the same time, we realize that the fixed income portion of your portfolio is not earning much, compared to certain time periods in the past. The rate of return on fixed income is low, in actual terms, as well as what is called the “real return,” which is the yield less the inflation rate. For example, if your fixed income is yielding 3.5% and inflation is 1.8%**, then the real return is 1.70%.

Unfortunately, due to this economic reality, to grow your assets net of inflation, you must take risk in stocks, as high quality fixed income securities are only earning 1-2% greater than the inflation rate. And this does not include income taxes on the earnings.

Though interest rates are low, we want to caution you to not increase your stock allocation unless you truly have the need, ability, willingness and time horizon to take on the extra risk that comes with owning more stocks. This is where talking with us, and planning, comes into play. In our role as your guide and advisor, we want to help you determine what is the appropriate balance of fixed income and stocks for your individual or family’s specific circumstances and goals.

There is still a vital role that your fixed income allocation plays, which is to provide downside protection when inevitable stock market declines occur. Owning fixed income mitigated losses in periods like the 4th quarter of 2018. While you may not earn much on your fixed income investments, the role of fixed income is still critical, to smooth out the ups and downs of stock markets.

We recommend that you factor in lower rates of return on fixed income, when you consider your financial future.

This means you may need to save more, as your fixed income earnings may be less.

It means you should generally not pay off a low interest rate mortgage early, as that is a significant “asset.” If your mortgage is higher than 4.5%, you should consider refinancing.

There are many implications to lower interest rates. Some are good and some are bad. We can help you to deal with this.

Please talk with us. We want to help you plan for your future.

Sources:

* bankrate.com, December 4, 2019

** usinflationcalculator.com, December 4, 2019

***barchart.com, December 5, 2019

Importance of Staying in the Game

Blog post #419

Markets go up. Markets go down.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source:

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