We typically write you letters about your volatile actions and the erratic behavior you bestow upon us as investors. Many of our letters also try to put certain economic events into perspective so that people don’t let your wild stock market swings force them into making bad decisions. All that said, it’s come to our attention that we can finally roll out the answer to a question that is not always obvious:
What should an investor do if a standard stock market correction turns into a bear market?
First off, let’s revisit the basic definition of a correction versus an official bear market. Click here for an article we wrote during the last correction in February, which incidentally at the time felt like the end of the bull market had finally come. Although the market sold off almost -10% in a short span, it clearly came back to reach record highs until October came around.
Let’s get this part out of the way…You’ve made a lot of people ill the past few days. As a matter of fact you’re following through on staying true to form by making October another historically miserable month.
After a two day blood bath we’re seeing a little bounce leading into the weekend but the stock market basically negated what was a surprisingly pleasant summer stretch. We’re now sitting around July levels and the previous correction in February of this year is suddenly somewhat deja vu. What’s not much different is the fact that most financial advice remains the same : “Stay the course. Don’t panic” Diversify.”
What happens in September often follows through and even intensifies in October. That being said just because “X happened last time” doesn’t mean “Y will happen this time”. We believe there will be more anxiety than normal this time around. The stock market and it’s bull run are not only long in the tooth but we also have mid-term elections coming up which regardless of real substance…they will stir up emotions and uncertainty. If we get a “red wave” you’ll likely see the market advance even higher for a few months and if we get a “blue wave” it’s our opinion there will be a sell-off. This is not a political opinion on which party is “better” so please remain calm; it’s simply a fact that if we have a meaningful shift in power there will be political gridlock for a couple of years. Long story short…one result will cause increased volatility and in our opinion the other will lead to that long grinding slow down where we actually could see the stock market finally roll over and enter a new cycle.
So…”don’t panic”? Well….sort of.
We’re going to share some of that same counsel but with hopefully a bit more actionable advice; do something! Continue reading →
We have discussed many times how emotionally driven you are. On some days you tempt us with your record setting high wire acts and on others we have our lips virtually wrapped around the barrel of a gun in desperation; the stock market is a wicked playground.
We don’t believe that computers or sophisticated investment algorithms can completely mitigate the perils of the stock market or protect everyone from getting out of their own way, but it can at least be used as a starting point. My Portfolio Guide relies on some very unique tools that assess the stock market each month with a fresh set of eyes. While our method of “reading the tea leaves” is not necessarily a crystal ball, it’s definitely not what most investment advisors use….which is the rear view mirror. Sadly enough, many investment advisors are just like you…they’re human and they chase recent returns and mistakenly look back in history as to what has done well. While this method of analysis is the easiest to sell clients (and themselves) it’s not as effective as taking a completely fresh look at what is happening right now and how that is statistically likely to play out in the near-term. Continue reading →
Why is the number 15 important for us to share with you today? In our opinion it’s because everyone seems to have a different idea of what “long-term” investing means. The notion that investors should think long-term is fine, and fairly generic advice, but that time frame has never been concretely defined; until now!
My Portfolio Guide defines long-term as being able to invest for at least a 15 year time horizon.
Using our definition even at retirement you could definitely be considered a “long-term investor”. Granted, you may be closer to needing to live on a fixed income or simply not have the stomach for the ups and downs of the stock market, but by our definition you are a long-term investor.
The average person is living longer so if you hung up the work boots at age 65, for example, going out 15 years puts you at age 80. Assuming you need investment funds to last at least to that age it would be wise to have a decent portion allocated towards growth investments. Putting your investments into bonds, CDs, or cash is a losing proposition once you factor in taxes and the silent and ever-growing killer of inflation.
Look…we get it…the stock market can make you lose your lunch. The roller coaster analogies are plentiful and with a 24/7 news cycle it seems like the slightest hiccup can create a bloodbath on Wall Street. All that being said, the odds of the stock market being positive over time are overwhelmingly in your favor and it’s still the place to be if you want to grow your wealth. Over one-year periods, between 1926 and 1997, Ibbotson found that stock returns were positive in 52 out of 72 years, or roughly three-quarters of the time. Even so there is obvious risk and volatility with the best year having stocks return +54% and in the worst -43%.
But now let’s turn to longer periods. Ibbotson looked at five-year rolling cycles over the same era (1926-30, 1927-31, etc.). Out of 68 separate, overlapping periods, stock returns were positive 61 times which works out to be almost 90% of the time! Over 15-year rolling periods (there were 58 of them) stock returns were positive every time.
Since 1926, the stock market – as measured by the S&P 500 with dividends reinvested, has never had a 15-year rolling calendar period with a loss. If that fact doesn’t register…please read it again. Never once in history has the stock market lost money over a 15 year period. The longer your time horizon the more likely it is that you’ll make money in a diversified stock portfolio.
One of the reasons financial advisors use other instruments in a portfolio outside of stocks is to diversify; that is also a nice way of saying it’s because they know you will likely be an emotional train wreck when volatility enters the arena. If there was a two horse race and we had to bank our entire livelihood on either the Bond horse or the Stock horse…it is without question which we would choose.
Furthermore, imagine if you could only open your investment account statements once every 15 years? Not only would you most likely be a less stressed and more successful investor, but the odds are substantial that you would have positive returns no matter what happened in the world.
What’s more exciting to watch: Duke versus North Carolina or Apple versus Amazon? If you’re reading this you know by now that it’s not a trick question but rather our annual opportunity to have some fun spinning the NCAA college basketball tournament into a platform to share our favorite investment themes.
My Portfolio Guide was the first investment firm to publish a March Madness investing tournament where we share our picks and match them up against each other. We break down and assign each of the four “regions” with an asset class and then pick teams (companies) that we think have the best chance at doing well relative to others.
This is the eighth year we’ve done this and it’s become one of the most popular articles on the entire internet!
Click the following link to see the entire bracket for 2018:
Many people now have the rearview mirror or armchair quarterback mentality right now. If you’re to be honest with yourself there are very few folks we met at this point last year that said without question that the stock market would soar to record highs. As a matter of fact, it was quite the opposite. Think back to the start of 2017 as most of us were still digesting the fact that Trump won the election. Most pundits felt that the “Trump bump” would be short lived and that the one thing the stock market doesn’t like is uncertainty …and we had plenty of it!
All that being said, we couldn’t have been more clear that if you kept your politics out of it you could have had a nice year! The easy trade was betting on America and the Large Cap asset class turned in a fine year. Guess what? We still think there is room to run here and the recent correction we experienced is exactly what the doctor ordered.
#2 US Steel (X) vs. #3 Reliance Steel (RS)
Unless you’ve been living under a rock you’ve heard that President Trump wants to reset the playing field on trade imbalances. Continue reading →
You’ve had some wild days but perhaps none were as volatile or memorable as October 19, 1987! 30 years ago today you plunged -508 points for a record -22% decline in just one day! By today’s standards the 508 point decline wouldn’t be something to celebrate but wouldn’t really move the needle too much; only about a -2.2% decline. Believe it or not we’ve now endured drops like this 17 times since then!
Speaking of today, however, what would it look like if we had another stock market crash? If the stock market lost -22% in one day we would see the Dow Jones drop about -5,094 points as of today’s close.
We have two questions for you with regard to this not so pleasant walk down stock market memory lane: Continue reading →
Many of our “letters” to you are with a cautionary approach so that readers of this blog fully understand the risks and rewards of engaging with you. With your erratic personality perhaps the last thing you need is a drug to add to your volatile ways. That said, we also attempt to sprinkle in some humor and puns to get our point across…even if you’re at an all-time high (first pun in case you’re not paying attention!).
Whether you are a proponent of legalizing marijuana or not there is no denying that the cannabis industry is real and here to stay. Would it surprise you to learn that cannabis is the United States’ second largest cash crop? Believe it or not it is the second most valuable industry next to corn and is worth over $40 billion! Several reports earlier this year also estimate that legal cannabis sales could grow by at least 30% in 2018.
The marijuana industry is predicted to grow like a weed (second pun). All kidding aside, the Bureau of Labor Statistics (BLS) projects over 250,000 new jobs in this industry by 2020 which is far more than those expected from manufacturing! By 2024 the BLS actually forecasts manufacturing jobs to decline by 814,000. Ignoring the potential growth in this industry or that it has fast become a major economic driver and job-creation force in the U.S. economy is a mistake.
Public opinion is still divided (not a surprise nowadays…) but it’s rapidly changing. A poll conducted by CBS News in July of 1979 revealed that only 27% of those surveyed thought marijuana should be legal; that number by mid 2017 is now at 61%. Even with this momentum there still remains some obvious hurdles: (1) Marijuana is still illegal at the Federal level and (2) Congress has plenty to focus on right now with healthcare and tax reform so legalization is a lower priority for now.
So…how do you play this opportunity, or should you???
If you’re a true investor as opposed to a speculator we’ll begin by letting you know there are major risks in this budding sector. (please tell us you caught that pun?!) Continue reading →