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.

 

Why this is so important

Blog post #474

One of the most important services that we provide for clients is preparing a written Investment Policy Statement (IPS) for them.

Developing a written Investment Policy Statement, along with a diversified portfolio, are critical for making the investment process more disciplined and systematic, and less emotional. For most long-term investors to meet their various financial goals and objectives, they need to be able to stay in the financial markets.

Having a written Investment Policy Statement can increase the likelihood that you will adhere to your plan (during both good and bad markets) and give you a better chance of attaining your financial goals.

An IPS document means you have a target for your asset allocation plan. You don’t just have a bunch of investments that are randomly thrown together. You have a written investment plan based on your current situation, your goals, needs, time perspective and tolerance for risk. This provides both you and us, as your advisor, with discipline to act rationally in a world full of unknowns and uncertainty. 

The IPS that we develop for each client states their overall asset allocation target, such as 70% stock / 30% fixed income, or 40% stock / 60% fixed income. It states what % of the stock allocation would be invested in the US and Internationally. It then identifies target allocations for various asset classes, such as US Large stocks, US Large value, US small and small value stocks, as well as for International asset classes and Real Estate.

For clients of our firm, having an IPS may seem logical as we have always used them.  However, some other brokers or financial advisors may not develop IPS documents or asset allocation plans for their clients.  If you don’t have a plan or target, how can you properly monitor the risk of your portfolio?

An IPS may sound like an impersonal document. But behind this Policy Statement is our understanding of your personal, family situation and your goals. We talk with you to learn and understand your objectives and concerns, before we prepare your IPS. Everyone is different and unique. Two people of the same age and assets may likely have different IPS’, as they are unique with different past experiences and different future goals. While the IPS is an unemotional document, preparing an IPS for each client is a very personal process.

Having an IPS allows us to manage portfolios in a rational manner. This means that we are not reacting to current events with guesses and predictions. We act and provide guidance in a disciplined manner. For example, during the onset of the Covid crisis last winter and spring, IPS’ provided us and our clients with the structure to buy stocks when markets fell, as we worked to maintain their stock allocations in the desired range. This enables us to help our clients maintain their stock exposures during times of great uncertainty and volatility, when your emotions may be telling you it’s time to get out of stocks.

Having an IPS with target asset allocations prevents your stock allocation from getting either too high or too low. When markets or specific asset classes go down, we would review buying more. This was mid-2020. When stocks increase, such as they have done very strongly in past months, we review client portfolios to see if their stock allocations have grown to exceed their target stock exposure. This is what we are doing now and have been doing over the past few months. This provides the discipline of buying low and selling high.

Your IPS would also clearly state that there will be times when your diversified portfolio will vary from major stock market indexes, such as the S&P 500. A diversified portfolio is very different than an index which is comprised of just US Large stocks. This means there will be periods, which could be months or years, when a diversified portfolio will underperform or outperform a major market index. We talk about this likelihood for portfolios to be different than major US indices with our clients in advance, to manage their expectations.

Your IPS can be revised. This is generally done because of changes in your financial situation over your lifetime, not usually due to changes in current financial markets. The goal is that the IPS is a long-term document that is not influenced by short-term ups and downs of the stock market. It is impacted (and modified) by changes in your life, your finances and your goals.

Isn’t the goal of investing to help you reach your financial goals? Then working with a financial advisor that uses a written Investment Policy Statement should be an important part of your financial planning.

 

Note: As a reminder, the blog will be emailed to you every other Friday going forward.

 

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

Thinking about risk

Blog post #445

I never know where the ideas for these blog posts will come from. That can be a little risky, as I need to develop an idea every week.

Early Wednesday morning I was on a phone call with Delta, to cancel a flight for a trip we were supposed to be taking for a family event that was to occur this weekend.

I was fortunate that my call was answered quickly and a very nice Delta employee was able to process the cancellation, which we had been unable to do online or via their app. As she was processing the cancellation, the woman asked how me, and my business, were doing. I told her how bad I felt for her, Delta and the other Delta employees, as they didn’t do anything wrong to cause the crisis they are now facing.

Then I realized that many Delta employees at all levels (executives, pilots, phone representatives, etc.) are likely facing a huge double whammy problem right now that could have been avoided.

  • Many of them likely didn’t manage their risk properly. Many of them likely took on way too much single stock risk, by owning lots of Delta stock.
  • This could have been avoided with proper advice and planning. At the same time when many of them could lose their income due to Covid-related job losses (or have their incomes reduced, if they are able to keep their job), they have incurred huge losses in their Delta stock ownings, which has been crushed. Double whammy of loss!! Ouch!

This got me thinking about risk. 

Some risk can be avoided. Some risk can’t be prevented.

Some risk can be minimized. But risk is always there.

Your risk needs to be managed properly.

Dealing with risk is vital. Helping you to deal with financial and emotional risk is one of our main roles and can be of great value to you.

We often talk about diversification and its importance. The examples below are real world and should be evidence of why you should not own a huge amount of any one stock, and especially if it is your employer. We have seen unexpected issues arise in the past that severely impacted one company, or an industry, or now with Covid, are impacting many different industries.

Delta: Is now down 63% from its 2020 high and was down 72% at its 2020 low.

Marriott: Is now down 40% from its 2020 high and was down 69% at its 2020 low.

JP Morgan Chase: Is now down 40% from its 2020 high and was down 69% at its 2020 low.

These are Covid related losses, and likely would not have occurred if not for this crisis. But there are many examples of companies and industries that have suffered great losses for all kinds of reasons, due to technological changes, bad decisions, product failures (think of the Boeing Max), or lack of keeping up with societal trends. Think of GE, Boeing and many large retailers. Some have succeeded, others have not.

The energy sector has been hurt over many years, which worsened due to the Covid pandemic this year. There are many far worse examples than this, but Exxon Mobil is down 53% from where it was trading in 2016, dropping from $95 to around $45 now.

What are the lessons from this?

  • Be diversified. Do not own too much of one stock and definitely not too much of your employer’s stock. Our globally diversified portfolios eliminate the risk of a concentrated portfolio, by providing lots of diversification. Our clients are very well diversified, both in stock and fixed income holdings, in numerous, structured ways.
  • People don’t think single stock risk or the lack of diversification will actually impact them. But it happens. Remember Enron? Lehman Brothers? Some “unexpected event” could cause a huge financial crisis at almost company.
  • Reaching for yield is a significant risk. If a stock or bond is paying a dividend or interest rate that is far above market yields, then there is much greater risk involved.
    • We have seen people buy stocks for the “great” dividend yield and then something happens to the company….and the dividend is cut or even eliminated…and usually the stock price has dropped as well.
    • This is why we focus on your goals and your overall portfolio, not on dividend paying stocks or the yield of your stock portfolio.
  • Overconfidence and not expecting risk to show up. You always need to be prepared for unexpected events and risk to show up, as we have experienced with the Covid pandemic.
    • You need to be prepared emotionally for stock market declines of 10%-20% within every year.
    • You need to be prepared for occasional major declines in stocks of 30-50%, which could take several years to recover.
    • This is why we focus so much on your overall asset allocation, on the mix of stock and fixed income, based on your specific needs, risk tolerance and time frame…so you will be able to handle these types of declines.
  • With the current Covid crisis….there is still a significant amount of risk (and unknowns) that remain. 
    • While segments of the stock market have made major recoveries from the March lows, there are still many unknowns related to the pandemic.
    • Will there be future waves of Covid-19 that return in the fall or winter, or later? How will localized outbreaks impact manufacturing, food production and other aspects of our lives?
    • What will unemployment look like going forward? How quickly or slowly will those now unemployed return to jobs, and at what income levels?
    • When will an effective vaccine be released that is proven to be effective on a mass basis, in the US and globally?
    • What new programs will the US and other governments introduce to provide income and help people, companies, and state and local municipalities to help bridge the financial gap? What further actions will the Federal Reserve take, to continue to provide the financial markets and companies with support?
    • How quickly will people return to restaurants, stores, large events? How fast or slow will that be? Months? Years?
    • When will people return to traveling and tourism, both in the US and globally?
    • As these unknowns gradually get answered or resolved, risk and market volatility will likely remain high. No one can provide answers to these questions. The markets will react suddenly to good news, as well as to disappointments. You need to be prepared for both. 
  • Even the smartest make mistakes and even repeat them.
    • Warren Buffett has just repeated one of his biggest mistakes. He wrote in the 2007 Berkshire Hathaway shareholders letter about buying US Airways preferred stock in 1989. It quickly stopped paying the high dividend he was expecting. He eventually sold the stock at a gain in 1998, but he said that owning airlines was like a “bottomless pit.”
      • He wrote in the 2007 letter: “Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”
      • After swearing off airline stocks forever, he and his team started to load up on airline stocks in the fall of 2016, and by December 31, 2019, Berkshire Hathaway had invested more than $6 billion, owning close to 10% each of the top 4 US airlines. After the Covid crisis crushed the airlines stocks in March 2020, Buffett announced that they sold their airlines holdings during April 2020, at significant losses. He no longer thought the risk of owning the airlines was worthwhile. He never anticipated a pandemic type risk when he considered buying these stocks in 2016.

Risk of loss will show up again. What seems like unexpected risks, like 9/11 or the Covid pandemic, are always there, but we do not focus on them until they become known events. Other seemingly “unexpected” events will certainly happen again in the future. We just don’t know what the source of the major event, or risk, will be….and what its impact will be in the future. As none of us has a crystal ball or can predict the future, we as your advisors have a key role in helping you to manage your risk. And we take that responsibility very seriously.

We want to help you manage your risk, so that you and your family can reach your financial goals, whatever they may be, knowing that there are known and unknown risks that will impact you in the future.

If we are able to help you reach and maintain your financial goals and help you to effectively deal with all the risks that will show up along that journey, then we will consider our relationship a success.

We hope that you and your family are healthy, and enjoy this Memorial Day weekend with appreciation for your health, and the sacrifices of many who have come before us, so that we are able to live and enjoy the benefits of our country. Even during this pandemic, we have much to be thankful for.

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

If you know of someone who may benefit from this blog regarding single or company stock risk, please forward this blog to them and let them know we are open to speaking with them.

 

 

Credit Card/Grocery Tips and Thoughts about Buffett

Blog post #443

Get more credit card benefits for grocery, restaurant and delivery purchases

As we are all buying or ordering more groceries, as well as using delivery services due to the pandemic, a number of premium credit cards have significantly increased their rewards for grocery purchases and food delivery services, either from grocery stores or restaurants.

Chase and American Express recently announced that for many of their premium credit cards, they will be offering up to 5X points or cash, on grocery store purchases. For some credit cards, this now includes grocery delivery services like Instacart.

Each credit card may have different benefits, and differing time frames (some through May 31, some until July 31), so you should check on each credit card’s specific benefits.

This may not be huge money, but if you can get 5% back, rather than 1%, that can make a difference to you and your family.

Other related items:

  • Some Chase credit cards are offering rewards for restaurant delivery services, like Door Dash. If you have these cards, take a look at their rewards or search for this on the Internet.
  • If you have normally charged all your purchases to accumulate airline or hotel points, you may want to consider using other credit cards that offer cash or points that are redeemable in other ways, especially if you already have lots of airline and hotel points, and don’t plan to travel in the near future (though we certainly hope that travel can resume sooner rather than later).
  • Instacart has become a popular grocery delivery service.  After using Instacart, I was very surprised with a recent purchase from a local grocery store (which is not a chain). While we thought this was a great service, there was a 12% mark-up on the food, plus a delivery fee, service fee, and we paid a tip as well.
    • In later reviewing the grocery store’s website, I learned that purchases through Instacart were marked up 12% (and ours was actually more), in addition to the other fees. Each grocery store’s relationship with Instacart is likely different.
    • While grocery delivery services are important these days, you should be aware of this cost, as it can be significant. We are more likely to pick up groceries that the store can pack, which will still be safe, and save a lot of money.

Thoughts on Warren Buffett’s virtual Shareholder meeting

This Saturday afternoon, Warren Buffett spent a few hours on a virtual live stream for Berkshire Hathaway’s annual meeting, providing a financial history of the US and the stock market, as well as discussing how Berkshire Hathaway and his team have handled the pandemic.

He announced that they sold all their airline stocks in late March and April, at significant losses. They had accumulated up to 10% stakes in the 4 largest US airlines in past years (Delta, Southwest Airlines, United Continental and American). He said, “the airline business has changed in a major way and the future of airlines is much less clear.” He said he made a mistake in buying them, as he believed the airline earnings would continue to increase, but that has changed now due to the pandemic.

The other major news was that Berkshire has not made any large stock purchases or deals in 2020.  This is quite different than in the financial crisis, when Berkshire made major investments or provided financing to many companies, including Goldman Sachs, Bank of American and others.

Buffett discussed the current situation as still having many unknowns, but the variance in possible outcomes is less than it was in March. He gave huge credit to Fed Chair Powell and the committee for their swift actions in March, 2020, and implied that the financial markets and the economy would be far worse now without their many programs and steps.

Our observations about Buffett/Berkshire’s actions and non-actions:

Buffet/Berkshire’s decision to sell all their airlines stock holdings, at or near a market bottom, could be viewed as startling or surprising, as he generally holds for the very long term. Buffett stressed in his comments that the sales should not be interpreted as his view on the overall stock market, only in relation to the airline sector.

Buffett is decisive, which is commendable. He acts quickly, when he buys, sells or makes transactional decisions. He is also confident enough in himself that he can admit a mistake and walk away from a loss.

This is just my assumption, but he must have thought that the other Berkshire companies would earn more with the proceeds from the airline stock sales than had he left the money in airline stocks. Or he thinks the airline stocks will decline much further or not recover for many years.

This is something to consider, as does he think that it will take many years for the airlines, and thus, hotels, travel and other leisure companies to get back to “normal,” or pre-pandemic earnings levels? This would be one of the many unknowns he referred to indirectly throughout the introduction and during his Q & A.

That Berkshire has not made any major stock purchases or provided financing to major corporations as they did in the Great Financial Crisis, or at other times in the past, is indicative of several factors, but should not be overly concerning to individuals as long-term investors.

  • Interest rates are very low and the Federal Reserve has taken strong action that has allowed large corporations to borrow huge sums in the credit markets recently (billions), which many were unable to do in 2008-09.
    • For example, Boeing is facing a severe cash crunch, due to their Max plane problems, and now the lack of demand for planes, due to Covid 19.
    • Last Thursday, Boeing borrowed $25 billion in one of the largest bond offerings ever. There were many different maturities, but the 10-year maturity paid 5.15%, or 4.50% more than the 10-year US Treasury bond. Boeing is rated just above junk status, as a very low-grade investment quality company, right now.
    • But instead of having to go to Buffett, and pay say 10-12%, which he may have been willing to entertain, other institutional investors (likely bond mutual funds, insurance companies, etc.) were more than eager to buy these Boeing bonds. As Buffett is not going to loan money to risky companies at 4-5-6% interest, he has not made these types of deals right now.
      • Just like we are not going to buy these Boeing bonds as investments for our individual clients. We would agree with Buffett that the risk is much greater than the reward. We are fine to pass on these.
  • Similarly, as the stock market dropped a lot very quickly and then has made a significant recovery, Buffett/Berkshire did not jump into the stock market to make any major purchases.
    • His view as a very patient, generally long-term investor has not changed. He wants to buy when he feels he is getting a bargain, or he perceives value. He views taking no action is an action.
    • Berkshire likely has more than $200 Billion already in many individual stocks. The top 5 holdings from 12/31/19 were Apple, Bank of America, Coke, American Express, and Wells Fargo. His holdings in these and other financial stocks have dropped significantly, due to less credit card usage, as well as increased default risk, if the pandemic crisis worsens or continues longer than expected, and there is not further governmental financial support. But he has not sold any of these major holdings, or anything else.
      • While Buffett clearly did not pound the table Saturday and say stocks are under-valued, he remains optimistic about the long-term prospects for stocks.
        • He provided clear caveats, and important reminders for stock investors, that stocks may not always perform well and there may be long periods without a recovery.
        • He said to be an investor in stocks, you must be prepared for significant declines, sometimes as much as 50%.
        • Buffett: “I don’t believe anybody knows what markets are going to do tomorrow, next week, next month or next year. Anything can happen. You need to be careful about how you bet simply because markets can do anything (in the short-term). Nobody knows what’s going to happen tomorrow.”
        • Buffett: “Equities (stocks) will outperform US Treasuries over the long term.”

Berkshire Hathaway and Warren Buffett are very different than you, our clients, and how we manage your portfolio. We feel it is important to listen and learn from Buffett and his team.

However, we are managing your portfolio so that you can meet your goals, and those of your family. Buffett is managing Berkshire Hathaway as a public company with a multi-generational mindset, and for stockholders, not to meet your personal spending and savings needs.

We share Buffett’s concerns and the many unknowns about the future. We have often stated that the future is unknown, because it is, but there are even more unknowns now than normal.

We are confident that we have structured your portfolio to be able to handle the unknowns of the future, by providing you with an appropriate amount of conservative fixed income “Foundation,” based on your personal circumstances. 

We remain confident long-term investors, for ourselves and for you.

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

 

Riding a Financial Roller Coaster

Blog post #442

Let’s imagine your investment portfolio is like a roller coaster.

There are different types of roller coasters, in this imaginary world.

Ride 1: This is not your typical roller coaster. It is very flat, with a gradual decline that is barely noticeable. Not much excitement. Kind of boring. Slow. You get into your car and you don’t even need to be buckled in. No seat belt is required. You can see that there are no curves or major ups and downs to deal with. You can tell the ride ends slightly lower than the starting point, but it is barely noticeable. It is safe and secure and easy to handle. From the beginning of the ride, you can see where you will end, safe and sound, as the ride is all outside.

  • This ride would be the equivalent of a portfolio that consists of only very conservative fixed income, with short maturities. There would be no stocks in this portfolio. Just CDs, government bonds, and maybe a few investment grade corporate bonds. Over time, the rate of inflation will probably exceed your rate of return.
  • Ride 1 has hardly any risk, but hardly any reward, in terms of fun, or financial gain.
  • This ride is generally recommended for older riders, or those with specific circumstances in the near term.

Ride 2: This is very different than Ride 1, but typical of most of the coasters in this imaginary theme park. As you near this ride, it appears daunting. You can clearly see that passengers are required to use a seat belt and an overhead harness. 

  • You can see that this ride starts with some ups and downs, as well as some major curves.
  • This coaster quickly enters a huge building, which you can’t see into. 
  • There is a large sign in front of the ride:  Shortly after the start of this ride, the remainder of the ride will be in the dark. You won’t know where the ride will take you.
    • You won’t know what will happen next. You can’t see where the ride goes, once it enters the building (like Space Mountain).
  • There is a very deep moat around the building, and it appears that the building was built far underground.
    • You expect that the ride will go very far down, at some points.
  • You are also thinking….there must be some pretty big hills and huge declines in this ride, but you will not know about them in advance.
  • You don’t know where the end of the ride is or even how long it is.
    • You can see that the building is massive, very tall and wide, rising much higher than the first ride you saw. It must go in many different directions.
  • As you near the boarding area for Ride 2you see another SIGN. It reads:
    • This ride is safe, but you must be prepared for ups and downs and unexpected curves.
    • You will not know what will happen in advance, at any point during this ride, once your car quickly enters the building.
    • The ride requires a seat belt and 2 shoulder harnesses, for your safety. We require all these safety measures for diversification, in case one does not work.
    • The length of time of this ride varies, sometimes greatly. Every ride will be different. This is what makes this ride unique.
    • This ride can be fun, but at times very scary! You have been warned!!
    • You can choose to ride alone, in a single-seater, or we offer a two-seater, so you can be accompanied by one of our expert guides, who will help with your experience. 
      • We highly recommend that you choose to ride with an expert guide.
      • If you chose to ride with one of our expert guides, they will meet with you in advance, to help prepare you for this ride.
      • They will also pull off the track and talk to you a number of times during the ride, to check and see how you are doing, and maybe make some adjustments, based on your experience and feelings during the ride.
        • They will not be able to tell you exactly when things will occur on the ride, but they will give you guidance that will enable you to be better prepared to make it through the entire ride.
    • You can get off mid-ride, and end the ride early if you want, but that will deposit you directly onto ride number 1. We don’t usually recommend that.
      • If you want to go back onto Ride 2, where you re-enter is almost impossible to predict. Re-entry to Ride 2 can be emotionally difficult.

Nearly all our clients are on Ride 2 and all elected to ride with an expert guide.

A few clients, as well as those anticipating buying a house or with kids entering or going into college, are on Ride 1.

You have survived Ride 2. You can handle it. 

You survived the downturn late in 2018. You enjoyed the large gains of 2019 and were enjoying additional gains through mid-February 2020.

Then another unexpected drop on the financial ride occurred, and the markets collapsed with the Covid onset.

And since March 23, just as unpredictably, the markets have strongly bounced back. April has been a very positive month.

We told you that markets would increase and decrease in ways that are unexpected and sometimes may not even seem rational. The key is to stay on the ride and to keep being prepared, and positive, about the future.

We will guide you along the way and help to make adjustments when necessary.

We don’t know how the ride will continue, but we are pretty sure there will be more good experiences than bad ones. And we will be there for you, as well as your friends and family members, if they want guidance on their financial journey.

 

Thoughts on Where We are Now and Headed

Blog post #441

As we near the end of April 2020, we thought it would make sense to step back and consider the past few months, as well as approaches for the future.

  • As we have stated many times in the past, one of the basic concepts that we have told our clients is that we do not have a crystal ball and we cannot predict the future. No one can accurately predict the future, repeatedly and successfully.
  • This is why we work with you as a fundamental building block to develop a personalized asset allocation strategy developed for your personal circumstances and needs.
    • Throughout this crisis, and many others that have preceded it, having an Investment Policy Statement (IPS), or asset allocation plan, has enabled clients to remain invested and in the long term, be able to continue and reach their financial goals.
    • We can’t control or predict the financial markets. But we can control your plan and how you are invested, to meet your short-term withdrawal needs and your long-term financial goals and objectives.
      • Thus, we recommend continuing to adhere to the strategy of maintaining your personal Investment Policy Statement (IPS), or asset allocation, especially in this very unpredictable period.
  • Despite a decline in your account value, which you could view as temporary, a key question to ask is: has this decline directly impacted your ability to have the financial resources that you need today, or within the next year?
    • While none of us are happy that account values have declined, the answer for all of our clients should be that they have the financial resources that they need for the short to intermediate term, for the next number of years. This positive answer is due to proper planning.
  • The stock market is not the economy.
    • Remember, the stock market tends to look into the future and may not reflect what the economy is doing right now. The stock market can be driven by many factors, such as cash flow and profit/loss projections, predictions and emotions.
  • Fed Chair Powell has done a terrific job so far.
    • The Federal Reserve has been strong, responsive and acted swiftly when needed, especially in March and early April. This is one of the key reasons that the stock market has recovered significantly from its March lows.
    • The Fed’s actions have helped to solidify the fixed income markets and has enabled many public companies to sell bonds during this crisis, to help them to have the liquidity to get through the shutdown period. The Fed’s decisions to purchase bonds of companies that were credit worthy prior to this crisis, and then expanded to less than investment grade debt, has also helped to stabilize the credit markets.
  • Diversification works, for both stocks and fixed income
    • We are strong believers in diversification at all levels, as are the mutual funds that we use to invest in.
      • The past few months has not changed our minds about this. If anything, during a crisis, diversification again has proven to be very important. 
    • While our client accounts have been volatile, there has not been the huge destruction of your investments compared to if we held a portfolio that had been concentrated in certain sectors, say for example…..lodging and travel, aerospace, airlines, retail, entertainment and energy. We have not had overall 40%-50%-60% declines, though these sectors are held as part of a diversified portfolios.
    • We don’t place bets on individual stocks or focus on sectors. The asset class funds that we use strongly believe in diversification and have guidelines across industries and companies, as well as geographic regions, for International and Emerging Market funds.
    • While we still believe in our core investment beliefs, that does not mean that we don’t make changes. We have modified our portfolios over past months, prior to and during this crisis, to reduce some exposure to small value holdings in both the US and internationally. We did this for the long term, as we wanted to increase exposure to small cap asset classes that were not strictly small value.
      • In the short term, this has been a positive move. Again, this was made to increase diversification further and should benefit clients over the long term, as we cannot predict which asset class will outperform, or when.
    • In fixed income, we have always been well diversified, and we are taking steps to strengthen your holdings, and add even greater diversification.
      • Due to the economic impact of the Covid crisis and the plunge in oil prices, certain companies that previously were investment grade or not at risk of near-term bankruptcy, are now potentially more at risk.
      • We have been proactive in selling bonds of companies that were previously much stronger financially. We would rather sell these bonds now, prior to their maturities, and not put your investment principal at further risk with these types of companies.
      • We are reviewing clients’ fixed income holdings very carefully, as we always have, for exposures to sector and financial risk.
      • We are using large and well-established bond funds with excellent track records, processes and methodologies, more than we did in the past, so your fixed income holdings will be even more diversified.
      • We will be more carefully monitoring the impact of this crisis on municipal bonds, as state and local revenues have been impacted. We already know that some of the strict purchasing guidelines we have in place, and have had since we started our firm, are still valid today, and have helped us avoid municipal bonds which are related to single sector issuances, like airport or certain single source building projects.
      • We want the fixed income “Foundation” of your portfolio to be as financially sound as it can be, even during this period of greater financial uncertainty.
  • Expect the unexpected
    • This certainly has been the case over the past few months. However, even with all this uncertainly, and there could be more in the future, we want you to have a sense of financial comfort.
  • We will continue to act and make rational decisions, not emotional ones. We are not going to place bets on when a vaccine will be discovered or how fast the economy will recover…..as no one knows those answers. We do know that sticking to a philosophy works, over the long-term. We will continue to do the following:
    • Regularly review and rebalance your accounts.
    • Place tax loss trades as appropriate, which will save you tax dollars.
    • Adhere to your financial asset allocation plan and modify that if your circumstances have changed.
    • Having a strong fixed income foundation and ample cash and liquid assets for those regularly withdrawing money.
  • We have again been reminded why we avoid certain types of investments.
    • We don’t invest in investment funds or products that are considered illiquid or restrict your right to redeem your money to a certain percentage a quarter or annually.
      • Many of these types of investments are not permitting withdrawals or severely restricting investors’ access to their money. We don’t want your money to be restricted, so we don’t use these types of products.
    • We don’t invest in high yield or junk bonds, as they have the greatest risk of default, and many of them declined significantly in value during past months. The higher interest rate that they offer are not worth it, if you don’t get your principal back.
    • We don’t invest in stocks primarily due to high dividend yield, as those companies tend to be the riskiest, like junk bonds. This does not apply to all companies, but those paying a very high dividend yield is often a sign of some type of underlying risk in the company. And usually the risk is not worth it, especially if the dividend is later cut or eliminated, or the price of the stock eventually declines significantly. This is what has occurred to many energy stocks. While the funds we utilize hold energy stocks, the exposure is quite small.
      • Bottom line….don’t reach for yield…..if the interest or dividend yield is far above the market average, there is usually a good reason…it is much more risky.

 

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

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.