Keep Calm and Invest On

Dear Mr. Market:Unknown-4

We always chide you for having such a volatile temper. Your unpredictability is both alluring yet often makes the most intelligent person seem like an imbecile. What’s your next move? Who will you reward in 2020 and who will you punish?

As an investor, it’s always hard when the market is volatile. Do what you must to relax – deep breathing, a nice long walk, maybe yoga. Try to ignore the talking heads on the financial news channels. You’ll get through this. Now is not the time for rash action based on emotion.

What’s that you say? You’re not worried? Hasn’t the market been up nicely for the last year?

Of course it has, and that soothed a lot of the fears stock investors had coming off a rough end to 2018. But it actually has been volatile. It’s just that upside volatility naturally feels a lot better than downside! However, both can lead to bad decision making.

Think about how you feel as an investor today, as compared to a year ago. Odds are that last year you were questioning having too much stock exposure, and now you may be wishing you had more. Both extremes can be dangerous. Imagine you gave into your fear during the late 2018 correction, and lightened up on stocks “just to wait for more clarity,” or something along those lines. The S&P 500 zoomed out of the gates in early 2019 and was up over 20% by the end of July! Then it finished up better than 30% for the full year. Giving in to fear and waiting for clarity would have kept you from participating in that upside.

Now imagine you were a disciplined investor, following an asset allocation plan for the long-run. Say your target is 70% stocks / 30% bonds, and you (or your advisor) rebalance toward that allocation at set intervals or deviations. After December 2018, you (or your advisor) would have taken money from bonds and added to stocks, since the 70/30 balance would have been out of whack. Yes, you would have added to stocks during a period of high uncertainty! In hindsight it would have looked like a great timing move, but in reality it would have been simple discipline.

Unknown-6That brings us to today. The market has been up and worries seem low. Likely your stock allocation has gotten out of whack again, but this time to the upside. What is the prudent investor to do? Again, ignore emotion and follow your plan. If this means selling stocks to rebalance, so be it. Maybe your gut says, “let the winners keep running.” You could do that, but ask yourself how good your gut has been at timing the market in the past.

From an investor psychology standpoint, staying disciplined when things feel comfortable can be a good exercise for when the market inevitably goes a little haywire. Warren Buffett is credited with saying, “Be greedy when others are fearful, and fearful when others are greedy.” Good advice…but if you focus more on discipline than market timing, your decision-making will not be driven by either extreme.

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Black Monday Revisited?

Dear Mr. Market:Unknown

When we reminisce and think of some of your worst days it would be natural to assume it was sometime during the Great Depression. Believe it or not the worst drop in stock market history (at least percentage wise) was not in 1929 but rather on October 19, 1987.

Click here to see what happened on that day, which is now known as Black Monday.

There were a number of issues underneath the surface that led to that bloodbath of a day but what amplified things was the early practice of program trading. Computers were programmed to execute trades after being triggered by certain conditions and this literally made human traders almost worthless as automation took over!

Two years ago, on the 30th anniversary of Black Monday, we wrote an article and calculated what a drop would be in today’s stock market. Click here to check it out. On that day it would have been equivalent to about a -5,094 points drop in the Dow Jones Industrial Average. If it happened this coming Monday…we would see the Dow Jones go from about 26,965 to 21,033 for a drop of -5,932 points.

Are you ready and what would you do? How is your current portfolio positioned in the event of something even half of that type of drop? We’re not trying to be “doom and gloom” financial advisors but we’re also not so oblivious or positive that we’re “running East in search of a sunset”.

All this being said, get your plan in place now and prepare yourself for such an event. Even if you just let your mind get in front of it and don’t make any portfolio changes, your emotions will at least be more in check. History and reality tells us, however, that most people will read this and not prepare any differently.

PS- Don’t be “most people”!

 

Where is the Recession?

Dear Mr. Market:Recession

Chalk it up to the “dog days of summer” but we haven’t written a letter to you in a while. Perhaps this is in part to the wild ride you’ve sent investors on since the whipsaw action and insane volatility we saw this past December. For those of us with short-term memory issues, the year ended in brutal fashion with the worst December in 80 years. If you sold out of your investments, threw in the towel and fell prey to your emotions, you then missed the best January the stock market has seen in 80 years. 

If you still haven’t paid much attention then perhaps the opening of this past week also hasn’t phased you…or should it?! Continue reading

What to do if the Stock Market Correction turns into a Bear Market?

Dear Mr. Market:

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? shutterstock_262478570

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.

So…can we now apply the four most dangerous words in investing? Continue reading

Top 3 “Less is More” Hurricane Florence Stocks

Dear Mr. Market:Ambulance-Chasers

We don’t make it a regular practice to be ambulance chasers every time there is a tragedy or natural disaster. That being said, almost every major event (whether it’s considered good or bad) can create an opportunity for your investment portfolio.

Conversely, the old adage of “less is more”, could certainly apply here. We’re not simpletons just for the sake of it but in general the ‘less is more’ approach can greatly benefit your finances. Think about it…and if you haven’t already, we’ll spell out several major ways that having less of something will benefit your wallet: Continue reading

What is “long-term investing” anyway?

Dear Mr. Market:th-19

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.
 
168036_600Look…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.

Stock Market : Points, Percentages, and Perceptions

 

Dear Mr. Market:

What do you think about the “largest point decline in history” ?!?pl9401-1-_custom-99c12255409cbb9e488da1fb6ce0900b683cda9d-s6-c30

Last Monday certainly wasn’t fun for anyone watching their portfolio but if you put things into perspective what you end up with was the 138th largest percentage drop for the S&P 500. The financial media predictably goes bonkers when reporting numbers and this fuels the fire for the average investor. Our beef with them isn’t even the “sky is falling” antics which happen on any big volume or down day but the fact that they skew reality.

We’re not trying to minimize the strong move or the fact that we’re finally seeing volatility back in the markets but keep your common sense hat on when digesting the results. First and foremost, when an index like the Dow Jones is almost at 27,000 points, simple math shows that a -5% drop will equate to about -1,350 points. A five percent pullback is not only par for the course but as we mentioned in our most recent article…very much needed and of course long overdue. With a total of just over -10% we finally have (by definition) reached a correction.

Who knows what Mr. Market has in store for us tomorrow but one thing we can almost guarantee you is that the financial media will be far more excited about it than anyone needs to be. Hysterics and click bait sells more than a rational report explaining stock market action that is actually not unusual nor completely out of historic proportion. Speaking of reports…we invite you to read this special update on our Columbus Strategy.

Click here to read the Columbus Strategy -2018 Stock Market Volatility Report

Maintaining-Discipline-in-the-Face-of-Market-Volatility-1What matters most in times like this is to level set things and to have a disciplined strategy firmly in place. Our signature approach for accounts over $100k is the Columbus Strategy and aside from its long-term track record what gives many clients some peace of mind is knowing that it ultimately looks to mitigate large and extended stock market drawdowns. We’re not so much focused on one month but over the course of a full market cycle you will be hard pressed to find a strategy that does better.

Nobody can consistently time the market but there are certain tactical adjustments that can be made to at least avoid longer stretches of market chaos. If we were to be visibly headed for a recession our stance on this recent correction would be much different than it is now. For the time being we’re approaching this correction exactly like we should be since it’s not our first rodeo; we’re nibbling at positions that we’ve wanted to add to and rebalancing any allocations that are not in line with a portfolio’s respective strategy.

Other than that the absolute worst thing you can do right now is act human! While that sounds crass we’re simply reminding you that people tend to have short memories and get way too emotional. If you want more information on our Columbus Strategy please contact us. Beyond that we will leave you with a quote and saying that we came up with many stock market corrections ago….1607859

“Stay disciplined to stay positive”.

-My Portfolio Guide