It is unfortunate, but true. There are no financial traffic lights that signal “green.” It’s all safe now…enter the stock market with no risk.
There are no reliable financial traffic lights that signal “red” and you should exit the stock market now.
So, how to handle the volatility that seems to face us? These are things we have been discussing with our clients. For years. Because in our view, “this time is not different.” Just the dates and issues have changed.
You must have a plan. It does not need to be fancy. Working with us, we will help you adhere to your plan. But you need to develop a written plan that provides for an asset allocation that makes sense for you and your family. We help to develop this plan, and how much to allocate to fixed income (cash, bonds, CDs) and how much to invest in stocks, and where, such as US, international, emerging markets and real estate. And we discuss with you the importance of “value” investing.
So what about now? What is going on?
Part of our philosophy is recognizing that we do not have a crystal ball and that we cannot predict the future. That being said, we are realistic and we are optimistic, for the long term. History teaches us that if we are patient, globally diversified investors, we will be rewarded. Most problems will get resolved. Companies, people and countries innovate and are resilient.
We recognize that there are many problems in the world, today. Right now, the financial markets are focused on Greece and European debt. Last year, the markets fluctuated with every drop of news from China. The US debt crisis and the “supercommittee” that is working on the US budget will be the focus in November.
We take a longer view. There are many positives. As Warren Buffett has stated, Mr. Market is usually too optimistic or too pessimistic. We feel that the markets’ decline this summer was overstated and caused more by emotional fear, than financial reality. We don’t think that future corporate earnings expectations have dropped by 15-20%. Many companies are reporting stronger earnings, have healthy balance sheets (corporate cash is at all time highs), have used record low interest rates to borrow cheaply and oil / gas prices have dropped or stabilized. These are all positives.
We also recognize that there are many problems. Governments of all types will need to reduce spending, to reduce their deficits. That reduction in spending will hurt economies and certain sectors. Uncertainty is a hot topic, especially in the press. Some type of uncertainty always exists. That will not change. We focus on what we can control.
Timing the market does not work. While worldwide stock markets declined in the third quarter, much of that decline has been recouped in the first few weeks of October. Just as no one could have predicted the steep decline on July 1 that subsequently ensued, no one could have predicted on October 1 the rally that has occurred.
We wish we had a crystal ball. We wish we had the perfect financial traffic light. Instead, we have a solid investment philosophy (which is not based on predictions and guess work) and financial planning skills that provide our clients with comfort and financial security. What do you have?
Wednesday, October 26, 2011
Tuesday, October 11, 2011
Dieting, Exercise and Investing. What's the Lesson?
How do you succeed at dieting, exercise and investing?
Are these unrelated? Not really.
Success at all three requires discipline, consistency and a program that you can stick to over the long term.
So how does this relate to investing? As advisors, we have adopted an investment philosophy that can be adhered to over the long run. It is rational, and provides our client’s with peace of mind, so they can stick with it.
In the past few weeks, the financial world has provided further evidence of why our approach makes sense, which gives us even greater confidence in our long term philosophy regarding stock investing. The markets have been very volatile since July, and our clients with stock investments have incurred losses, as have most others. But there is a distinct difference in approach.
We recognize that we cannot predict the future. We do not believe that we can identify which fund or money managers will do the best over the long run. Thus, we have adopted a philosophy which recognizes this.
A few weeks ago, Fidelity Magellan replaced the manager of this very large mutual fund, after years of underperformance. Over the last 10 years, this fund, once the largest in the world, ranked in the 95th percentile (1 being the best), trailing its benchmark and the S & P 500 by approximately 2.7% per year.
Fidelity, and this manager, have vast resources and a huge, global staff to assist in the research and stock picking for this fund. Despite all these resources, Fidelity’s staff was unable to outperform or come close to its target benchmark on a consistent basis, or even a majority of the time. The lesson: it is hard to pick a good money manager, in advance, that will outperform its respective benchmark, on a consistent basis over a long period of time.
The second example has been a number of reports of hedge funds reporting huge losses or funds that are simply shutting down, due to underperformance or dissatisfied investors. John Paulson, a hedge fund “titan” was an investment hero in 2008, as he placed huge bets against mortgage and financial stocks, and he was right.
Now fast forward to 2011. The WSJ reported today that two of his funds are down 32% and 47% for the year, far worse than market averages. He has placed huge bets on Bank of America, Hewlett-Packard and China’s Sino-Forest Corp. He has been very wrong in 2011. His funds have also lost billions on investments in gold and gold related stocks. Many of his clients are impatient and not willing to wait for his next great idea.
The lesson: There are many. Making huge, concentrated bets are risky. Sometimes they work, sometimes they don’t. When they don't, and your bets are very concentrated, the results can be horrendous.
Diversification, and not making concentrated bets and predictions, does work, which is why that is one of our core philosophies.
Our next post will further explain our investment philosophy.
Sources: Morningstar, for Fidelity Magellan; WSJ for Paulson information, 10/11/11 online
Are these unrelated? Not really.
Success at all three requires discipline, consistency and a program that you can stick to over the long term.
So how does this relate to investing? As advisors, we have adopted an investment philosophy that can be adhered to over the long run. It is rational, and provides our client’s with peace of mind, so they can stick with it.
In the past few weeks, the financial world has provided further evidence of why our approach makes sense, which gives us even greater confidence in our long term philosophy regarding stock investing. The markets have been very volatile since July, and our clients with stock investments have incurred losses, as have most others. But there is a distinct difference in approach.
We recognize that we cannot predict the future. We do not believe that we can identify which fund or money managers will do the best over the long run. Thus, we have adopted a philosophy which recognizes this.
A few weeks ago, Fidelity Magellan replaced the manager of this very large mutual fund, after years of underperformance. Over the last 10 years, this fund, once the largest in the world, ranked in the 95th percentile (1 being the best), trailing its benchmark and the S & P 500 by approximately 2.7% per year.
Fidelity, and this manager, have vast resources and a huge, global staff to assist in the research and stock picking for this fund. Despite all these resources, Fidelity’s staff was unable to outperform or come close to its target benchmark on a consistent basis, or even a majority of the time. The lesson: it is hard to pick a good money manager, in advance, that will outperform its respective benchmark, on a consistent basis over a long period of time.
The second example has been a number of reports of hedge funds reporting huge losses or funds that are simply shutting down, due to underperformance or dissatisfied investors. John Paulson, a hedge fund “titan” was an investment hero in 2008, as he placed huge bets against mortgage and financial stocks, and he was right.
Now fast forward to 2011. The WSJ reported today that two of his funds are down 32% and 47% for the year, far worse than market averages. He has placed huge bets on Bank of America, Hewlett-Packard and China’s Sino-Forest Corp. He has been very wrong in 2011. His funds have also lost billions on investments in gold and gold related stocks. Many of his clients are impatient and not willing to wait for his next great idea.
The lesson: There are many. Making huge, concentrated bets are risky. Sometimes they work, sometimes they don’t. When they don't, and your bets are very concentrated, the results can be horrendous.
Diversification, and not making concentrated bets and predictions, does work, which is why that is one of our core philosophies.
Our next post will further explain our investment philosophy.
Sources: Morningstar, for Fidelity Magellan; WSJ for Paulson information, 10/11/11 online
Wednesday, October 5, 2011
Financial Advisors Keep Learning
As the world is continuously changing, and the financial markets certainly are, it is important that we as financial advisors continue to learn, listen and interact with top industry experts.
Keith and I recently attended a series of programs in late September, as we do multiple times a year. I participated in a “Masters Forum” study group on Friday and Saturday, September 23-24th. This group of 20-25 members, which started in 2006, meets twice a year, once in the fall and once in the spring. We also talk in smaller groups every two weeks, to discuss topical issues. Keith participated in a similar study group on Sunday, and also talks to members of his peer group on a regular basis throughout the year.
These sessions were followed by the BAM Annual National Conference, which is a 3 day event featuring top speakers from across the country. This conference is attended by approximately 125 firms, representing $14 Billion in assets under management.
The following are some of the items from these meetings:
Keith and I recently attended a series of programs in late September, as we do multiple times a year. I participated in a “Masters Forum” study group on Friday and Saturday, September 23-24th. This group of 20-25 members, which started in 2006, meets twice a year, once in the fall and once in the spring. We also talk in smaller groups every two weeks, to discuss topical issues. Keith participated in a similar study group on Sunday, and also talks to members of his peer group on a regular basis throughout the year.
These sessions were followed by the BAM Annual National Conference, which is a 3 day event featuring top speakers from across the country. This conference is attended by approximately 125 firms, representing $14 Billion in assets under management.
The following are some of the items from these meetings:
- Investor behavior is critical to investment success. That was the message of Carl Richards, of http://www.behaviorgap.com/. This NY Times weekly writer and sketch artist, has developed a series of sketches to explain and discuss complex financial issues in a simpler manner. We now have 4 of his sketches in our office, and will soon have a fifth. Visit us to see them!
- Carl emphasized the importance of investors' behaviors and emotions, which cause huge gaps (differences) between market returns and what most people actually earn on their own (usually much less!).
- We interacted with a number of portfolio managers and mutual fund executives, regarding updates on the financial markets and the strategies that we utilize. We are very confident in our long term investment philosophy, which for stocks is primarily implemented through Dimensional Fund Advisors (DFA) mutual funds.
- Hedge funds: we continue to not recommend them, as they are hard to evaluate, costs are huge (relative to mutual funds that we recommend), a substantial numbers of these funds fail, which makes historical analysis very difficult, as the poor performing funds drop out of the databases.
- We heard one of the top national speakers on retirement distribution strategies.
- Portfolio rebalancing is critical for long term investment success. Having the discipline to rebalance (to buy certain stocks when they are low, and sell certain stocks when they are high) remains a key part of our philosophy and value we provide to our clients.
- We discussed the importance of communication skills and truly listening to our clients. One of the speakers, Mitch Anthony, has written a book titled “Defining Conversations.” He stressed the importance of real conversations, about deep issues and concerns, not just having superficial discussions. I started this book and highly recommend it.
Throughout the five days, we had the opportunity to share ideas and discuss various topics with both industry experts, as well as our peers throughout the country. This strong network of fellow advisors is an important component of our firm, as being able to discuss both specific client situations and general financial issues is critical to maintaining our discipline and add intellectual value on behalf of our clients.
Thursday, September 29, 2011
How a Financial Advisor Adds Value
The financial markets have been turbulent again in recent days. But does this really affect you, today?
Asset Allocation
A financial advisor should determine what the appropriate amount of your money should be invested in stocks, while at the same time providing you with a solid cushion of cash, CDs and bonds. This way, you can sleep well at night, without worrying about the everyday movements of the stock market.
We all realize that it is easier to be an investor when stock markets are going up, but it is times like these, where major decisions (and major mistakes) can be made.
For example, we work with clients so that they have many years of cash and bonds available, so that if the stock portion of your investments goes down (temporarily), you will not be impacted (today) and need to sell the stocks right now.
Time Frame and Faith
A key component of the above planning, is that we understand what a client's time frame is. For someone with a long time frame, or does not need to withdraw money from their investments right now, a decline in the stock market should be viewed as temporary. As Warren Buffett often says, Mr. Market is always setting a new price, and it is usually either too high or too low.
We clearly recognize that there are many economic issues facing the US and the world currently. However, the same could be said about most time periods of the past, as well. The economies of the US and the world are resilient. The issues and challenges change, but there is always uncertainty.
We are realistic in our concerns, but longer term, realize that history teaches us that stocks do well in the long run, and particularly after down markets. The current volatility can be viewed as an opportunity.
If the economy looked terrific, and that was clear to everyone, then the markets would be at a high....and maybe you should be considering selling some stocks (we call this disciplined rebalancing).
At times like this, when there is uncertainty and fear, there can be a number of reactions. To freeze and not make any decisions is not in your best interest. If you feel you have not done good planning, or do not feel comfortable with your investments, then NOW is the time to act, to be decisive, or to get a "second opinion" of your investments.
Asset Allocation
A financial advisor should determine what the appropriate amount of your money should be invested in stocks, while at the same time providing you with a solid cushion of cash, CDs and bonds. This way, you can sleep well at night, without worrying about the everyday movements of the stock market.
We all realize that it is easier to be an investor when stock markets are going up, but it is times like these, where major decisions (and major mistakes) can be made.
For example, we work with clients so that they have many years of cash and bonds available, so that if the stock portion of your investments goes down (temporarily), you will not be impacted (today) and need to sell the stocks right now.
Time Frame and Faith
A key component of the above planning, is that we understand what a client's time frame is. For someone with a long time frame, or does not need to withdraw money from their investments right now, a decline in the stock market should be viewed as temporary. As Warren Buffett often says, Mr. Market is always setting a new price, and it is usually either too high or too low.
We clearly recognize that there are many economic issues facing the US and the world currently. However, the same could be said about most time periods of the past, as well. The economies of the US and the world are resilient. The issues and challenges change, but there is always uncertainty.
We are realistic in our concerns, but longer term, realize that history teaches us that stocks do well in the long run, and particularly after down markets. The current volatility can be viewed as an opportunity.
If the economy looked terrific, and that was clear to everyone, then the markets would be at a high....and maybe you should be considering selling some stocks (we call this disciplined rebalancing).
At times like this, when there is uncertainty and fear, there can be a number of reactions. To freeze and not make any decisions is not in your best interest. If you feel you have not done good planning, or do not feel comfortable with your investments, then NOW is the time to act, to be decisive, or to get a "second opinion" of your investments.
Monday, August 8, 2011
The US Govt Debt Downgrade, Debt Ceiling and You
As I write this on Sunday evening, August 7th, the financial markets and economic news have been extremely volatile and mostly negative over the past 10 days. As always, it is important to take a step back and try to look at events with perspective.
First, the US Government spent weeks haggling over raising the Federal debt ceiling. What is normally a routine process became a very tumultuous one.
The impact: in the short run, the uncertainty of whether the issue would be resolved caused the stock market to decline, prior to the agreement between Congress and the President. In the longer run, the process and agreement has heightened the public awareness of the need for national fiscal responsibility, which is good. (Similarly, Ross Perot raised this awareness before Bill Clinton’s first election, which resulted in many economic positives, such as lower interest rates and good stock markets).
Downgrading of US Government debt by Standard &Poors: The possibility of this action had been rumored, but not widely realized by the general public. Thus, it is likely that financial markets will react negatively to the news.
The impact: This is interesting to consider. If "Wall Street" had an inkling this was to occur, interest rates would have risen or would be rising. Interest rates have done the opposite. Interest rates have been steadily falling, particularly in the past few months. The 10 year Treasury has declined from 3% at the beginning of the year to around 2.45% as of last Friday.
The impact of the downgrade may be long-term positive, if it causes Washington leaders of both parties to realize they need to compromise their hard line positions. Standard & Poors was correct, as they cited the negative political climate and ineffectiveness of Washington in their reasoning. We don't expect the US to default on any Treasury securities. However, the current deal does not make many specific decisions. The really tough decisions are handed to a committee. The huge reductions are delayed toward the end of the 10 year period. And most importantly, the actual deficit is not declining. The agreement is only slowing the rate of growth in the deficit. Thus, the downgrade may force US leaders to actually work on making those tough decisions, and making them stick. If that occurs, that would be real progress.
Oil prices have been declining, and sharply in the past week. The price of oil per barrel was recently in the $95-100 range and is now trading around $84/barrel. This is due to the anticipated decline in the economy, as well as trading factors (normal volatility). Thus, gas prices should remain well below $4, and may go below $3.50 per gallon soon. This is good for the consumer and will provide some needed stimulus to the economy.
Impact to investors:
In tough times, it is good to reflect on the basics, our core fundamental philosophies and consider the thoughts of those we respect the most. With that in mind....
We believe in focusing on the long-term and on matters that we can control. Thus, it is not a winning strategy to try to time the market in the short-term.
I don't think Warren Buffett is waking up Monday ready to sell stocks because of the US debt downgrade. He often says, and has profited from, buying when others are scared (during market declines). It is better to buy when there is fear and sell when others are being greedy. Thus, we would be more inclined to be buyers than sellers now.
It is vitally important to be properly allocated and have a globally diversified portfolio. Properly allocated means having ample cash or fixed income assets, to financially and psychologically handle markets downturns. We work with our clients to have such written strategy plans in place.
One of the greatest benefits that we can assist our clients with is just talking to them, to discuss these events, so they can better understand them and the impact they can have on their personal lives. It is our goal that our clients be able to have greater financial comfort and security, as well as peace of mind.
First, the US Government spent weeks haggling over raising the Federal debt ceiling. What is normally a routine process became a very tumultuous one.
The impact: in the short run, the uncertainty of whether the issue would be resolved caused the stock market to decline, prior to the agreement between Congress and the President. In the longer run, the process and agreement has heightened the public awareness of the need for national fiscal responsibility, which is good. (Similarly, Ross Perot raised this awareness before Bill Clinton’s first election, which resulted in many economic positives, such as lower interest rates and good stock markets).
Downgrading of US Government debt by Standard &Poors: The possibility of this action had been rumored, but not widely realized by the general public. Thus, it is likely that financial markets will react negatively to the news.
The impact: This is interesting to consider. If "Wall Street" had an inkling this was to occur, interest rates would have risen or would be rising. Interest rates have done the opposite. Interest rates have been steadily falling, particularly in the past few months. The 10 year Treasury has declined from 3% at the beginning of the year to around 2.45% as of last Friday.
The impact of the downgrade may be long-term positive, if it causes Washington leaders of both parties to realize they need to compromise their hard line positions. Standard & Poors was correct, as they cited the negative political climate and ineffectiveness of Washington in their reasoning. We don't expect the US to default on any Treasury securities. However, the current deal does not make many specific decisions. The really tough decisions are handed to a committee. The huge reductions are delayed toward the end of the 10 year period. And most importantly, the actual deficit is not declining. The agreement is only slowing the rate of growth in the deficit. Thus, the downgrade may force US leaders to actually work on making those tough decisions, and making them stick. If that occurs, that would be real progress.
Oil prices have been declining, and sharply in the past week. The price of oil per barrel was recently in the $95-100 range and is now trading around $84/barrel. This is due to the anticipated decline in the economy, as well as trading factors (normal volatility). Thus, gas prices should remain well below $4, and may go below $3.50 per gallon soon. This is good for the consumer and will provide some needed stimulus to the economy.
Impact to investors:
In tough times, it is good to reflect on the basics, our core fundamental philosophies and consider the thoughts of those we respect the most. With that in mind....
We believe in focusing on the long-term and on matters that we can control. Thus, it is not a winning strategy to try to time the market in the short-term.
I don't think Warren Buffett is waking up Monday ready to sell stocks because of the US debt downgrade. He often says, and has profited from, buying when others are scared (during market declines). It is better to buy when there is fear and sell when others are being greedy. Thus, we would be more inclined to be buyers than sellers now.
It is vitally important to be properly allocated and have a globally diversified portfolio. Properly allocated means having ample cash or fixed income assets, to financially and psychologically handle markets downturns. We work with our clients to have such written strategy plans in place.
One of the greatest benefits that we can assist our clients with is just talking to them, to discuss these events, so they can better understand them and the impact they can have on their personal lives. It is our goal that our clients be able to have greater financial comfort and security, as well as peace of mind.
Monday, July 25, 2011
Investing and the Debt Ceiling: Our Thoughts
As this is written, mid-day on Monday July 25, 2011, Congress and the White House are at an impasse on resolving the impending debt ceiling limit, which must be resolved by August 3rd.
How should an investor react to this situation?
As clients and readers of this blog know, we advise clients to focus on the “long term” and on events that are within your own control, when developing your personal investment plan/strategy.
There are always going to be events and issues that cause investors stress and uncertainty. The financial markets do not like uncertainty. As uncertainty rises, markets tend to fall. However, the “financial markets” are really made up of individuals each making decisions, either on behalf of their individual portfolios or individuals who work for large institutions or brokers and financial advisors.
It is nearly impossible to act in a profitable manner, by anticipating future events. For example, the financial markets rallied last week, as progress (unexpected good news) was made on the debt limit issue. As that progress turned into a stalemate over the weekend (unexpected negative news), many expected the financial markets to drop significantly this morning. As I write this, the US markets are down less than ½%, which would be a surprise to many.
We would not recommend adjusting your portfolio in reaction to this specific event, assuming that you have a proper asset allocation and financial strategy for the long term. It is reasonable to expect some additional stock market volatility (meaning losses), if no progress is made in the next few days. It is not a winning strategy to make significant portfolio changes in response to specific events. It is almost impossible to time the markets, to be able to sell stocks at the right time and then buy back in at the right time.
We are concerned that our elected officials are not able to resolve these matters until the last minute, which is unsettling. However, we feel that the need to resolve the issue will prevail, though it may be a bumpy process. In the long run, the increased focus on Federal fiscal responsibility is important and it is being addressed, regardless of one’s political views.
How should an investor react to this situation?
As clients and readers of this blog know, we advise clients to focus on the “long term” and on events that are within your own control, when developing your personal investment plan/strategy.
There are always going to be events and issues that cause investors stress and uncertainty. The financial markets do not like uncertainty. As uncertainty rises, markets tend to fall. However, the “financial markets” are really made up of individuals each making decisions, either on behalf of their individual portfolios or individuals who work for large institutions or brokers and financial advisors.
It is nearly impossible to act in a profitable manner, by anticipating future events. For example, the financial markets rallied last week, as progress (unexpected good news) was made on the debt limit issue. As that progress turned into a stalemate over the weekend (unexpected negative news), many expected the financial markets to drop significantly this morning. As I write this, the US markets are down less than ½%, which would be a surprise to many.
We would not recommend adjusting your portfolio in reaction to this specific event, assuming that you have a proper asset allocation and financial strategy for the long term. It is reasonable to expect some additional stock market volatility (meaning losses), if no progress is made in the next few days. It is not a winning strategy to make significant portfolio changes in response to specific events. It is almost impossible to time the markets, to be able to sell stocks at the right time and then buy back in at the right time.
We are concerned that our elected officials are not able to resolve these matters until the last minute, which is unsettling. However, we feel that the need to resolve the issue will prevail, though it may be a bumpy process. In the long run, the increased focus on Federal fiscal responsibility is important and it is being addressed, regardless of one’s political views.
Wednesday, June 29, 2011
10 Years from now Tweet
Diversify globally. Be disciplined. Focus on long term. Have a written plan. Control what you can control. Be positive.Use index-like funds.
Today's @dominoproject related prompt was to write a message to yourself, 10 years from now, in the form of a text or tweet. A tweet is limited to 140 characters, as is the above advice.
This advice is short and concise, but I am very confident that 10 years from now, this will prove to be good advice, which will benefit those that adhere to it.
Today's @dominoproject related prompt was to write a message to yourself, 10 years from now, in the form of a text or tweet. A tweet is limited to 140 characters, as is the above advice.
This advice is short and concise, but I am very confident that 10 years from now, this will prove to be good advice, which will benefit those that adhere to it.
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