April 2019: First Quarter Review

April 2019: First Quarter Review

Wealth is the ability to fully experience life. –Henry David Thoreau

2018 is but a distant memory as 2019 has come in fast and furious! In a very short amount of time we wiped away all of 2018’s losses in the unmanaged stock market indexes. This is a quarter that investors and financial advisors dream of, however now more than ever it is time to keep a level head. You hear me say the same thing over and over, and for good reason. Investing is a commitment and in this commitment you need to stay calm.

In the video I discuss humility and bias. Why? Because none of us can predict the future, we do our best to try by watching the news and this forecast and that one, however these media reports consistently report to stretch either negativity or positivity. Middle of the road, even newscasts don’t make headlines, so it’s our job to take everything with a grain of salt.

Watch my short video or read the transcript below and I give a quick breakdown of what we’ve seen so far in 2019.

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Transcript

Hi there.  Mike Brady with Generosity Wealth Management, a comprehensive financial services firm headquartered right here in Boulder, Colorado.

First quarter is over of 2019 and it was a banner year.  These are the types of quarters that investors and financial advisors, frankly, live for.  In a very short amount of time we wiped away all of 2018’s losses in the unmanaged stock market indexes.

April 2019: First Quarter Review Chart 1Today I want to talk about humility and bias because I think that they’re very important.  I mean just three, four, five months ago there was so much things are horrible and the stock market has continued to go down.  A lot of pessimism.  And then there was lots of optimism in January and February followed by, just three or four weeks ago I was reading an awful lot of pessimism. And the reason why I bring this up is humility.  I don’t know the future any more than you know the future and definitely not any more than those that you see on TV or writing those newsletters or those magazine articles. I mean just take it with a grain of salt, okay, because I think that it’s important for us to have a long-term plan, stick with it and not get too deviated by their particular biases.

And so now I want to kind of shift into bias.  The bias of those in the media is not to be even-keeled.  It is to be sensational either to pump things on the upside and be overly enthusiastic or to be very negative. Just to say oh my April 2019: First Quarter Review Chart 2god, the world is about to end.  Because both of them get headlines.  Both of them run the viewership up into record digits.  Saying “oh, everything’s all fine.  Let’s just do the middle way” doesn’t really fly.  And so you’ve got to read or listen to your news that way with that particular filter.  I would actually argue that’s a good way to go through life because what is your personal bias?  Is your personal bias to be optimistic or to be pessimistic?  Right now I’m just telling you that going back to 1929, three out of four years is positive.  One out of four has been negative in the unmanaged stock market indexes.  So that means if you’re pessimistic you’re really only right one out of four times.  Being pessimistic might serve you well if you are in a bad neighborhood, to keep your guard up, to be fearful. But it doesn’t really serve you very well, frankly, in your investments.

So think about it even from a relationship point of view.  If you are afraid of being disappointed in friendships is the answer to have no friends?  No.  The answer is why don’t I look at myself and see if I can moderate my reaction to my disappointments when a friend might disappoint me.  That’s the more logical way I would argue in your relationship or friend relationships but also as it relates to investments.  Is the better way to be overly optimistic, overly pessimistic or to take your news with a filter but look for the even way?  To understand that hey, my bias might be pessimistic but wait a second, is this the real truth?

April 2019: First Quarter Review Chart 3Recently and before I end today’s newsletter there’s been a lot of talk about the inverted yield curve and I wanted to talk about that for a second. The economy is not the stock market. That’s very important to make that differentiation.  The inverted yield curve and we can talk about the difference between the ten year and the two year (maybe I’ll do that in an instructional video next month), but when you see that yes, that has led eventually or at least predicted most of the time to a recession.  But it’s been a huge differential between seven months and nineteen months.  And during that time as I look back over the last – I’m going to put a graph up there on the screen – there’s been some nice April 2019: First Quarter Review Chart 4stock markets during that timeframe and some nice times to be invested.

I would argue that since there’s a huge variance there of delay and some false positives that it’s not as good of an indicator as you would be led to believe. But even then it’s an indicator of the economy.  The economy is not the stock market.  It’s very important to remember that.  If you look back at the early 90’s there was an indicator of a recession which did happen.  However, does that mean that you shouldn’t have investments?  No way.  The 90’s were one of the best ten year timeframes ever and I certainly wouldn’t take that as an indicator.  The last ten years has been a relatively moderate recovery from the Great Recession when you look at all the underlying GDP numbers versus the averages.  However, this last ten years I’m certainly proud that many people invested in the markets and kept their investments over the last ten years.  The unmanaged stock market indexes have been very favorable even if the economy was not as ripping and roaring as they have in prior decades.

Anyway, Mike Brady, Generosity Wealth Management, 303-747-6455.  Give me a call at any time.  Have a wonderful day.  Thank you.  Bye bye.

December 2018: Big Market Declines

December 2018: Big Market Declines

“I have a lot of things to prove to myself.  One is that I can live my life fearlessly.” – Oprah Winfrey

There has been a lot of volatility this year, and in the past few months, almost all of it down.

While I routinely send out a quarterly newsletter and video, due to the extent of the news and conditions right now, I’ve been sending more frequent updates with my current thoughts and advice.

I highly encourage you to listen to my most recent newsletter video (it’s a little over 5 minutes).

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Transcript

Hi there, Mike Brady with Generosity Wealth Management; a comprehensive financial firm right here in Boulder Colorado.  So I’m recording this on the morning of December 24, Christmas Eve.  I want to talk about what happened last week the week before Christmas and frankly this entire year because this is going to be a trifecta when we look at negative stock market probably for 2018, unless there’s some miracle in the next couple of days with the unmanaged stock market indexes.  Same thing with the indexes for the bond markets and for the international markets in general, kind of your developed market international.  It’s kind of a trifecta everywhere things were negative for 2018.

I think it’s very natural for people to say why, why did this happen?  And just like 2017, which was a very, very good year, people assume that it will continue.  Many people thought okay great, 2018 is going to continue just like 2017.  That was wrong.  2018 does not mean that 2019 will be negative, it just doesn’t work that way.  As a matter of fact going back historically one out of every four years is negative and yes sometimes when the stock market is down the bond market is down as well. That does happen.  But the way I like to think of it, and I did this great video, which I might provide a link to, where I say that life is more like poker than it is chess, you’ve got to make sure you get the right lessons from it.  Chess is completely strategic, you know, X leads to Y I mean that just is it.  At the end of the day the better player will always win at the conclusion of a chess game.  Poker is not that way there’s an element of things outside of our control.

The reason why I bring that up is we’ve got to have the right lesson.  Just because things are negative doesn’t mean that there was either a mistake or that we should change our particular strategy.  If you go through a red light and you’re not hit by another car that doesn’t mean that going through red lights is good.  Or if you go through a green light and you are hit doesn’t mean that going through green lights is bad.  It just doesn’t work that way.  And so when we look at the long-term we have to make sure that we don’t make short-term decisions based on long-term goals.  That’s very, very keen.  As a matter of fact that’s one of the mistakes that investors have a tendency to make is they let their emotions, I’ve already acknowledged that being scared and disappointed is a very natural thing; we’re emotional human beings.  The question is what do we do with it from there?  Do we act on those things or do we say I created a plan that allows me to stick with it knowing that there will be highs and that there will be lows.  And I believe that there will be more highs than there will be lows and over time historically diversified portfolios.  Not those in just one sector like technology, not those just in emerging markets or some place very non-diversified, but in a diversified market historically that has been the case.

When we look back at diversified portfolio going all the way back to 1950 of 50 percent stock market index 50 percent bonds, there’s actually never been a five-year time horizon where we haven’t at least broken even or made just a little bit of money.  I’m going to put that chart up there on the screen so that you can see it for yourself.  Have there been one, two and three years?  Absolutely.  As a matter of fact just in the last 15 years we’ve had a couple of those, we’ve had 2000, 2001 and 2002; those years were negative for the stock market followed by a very nice 2004, ‘05, ’06.  And then in 2008 it went down again.  Very painful.  If you had a diversified portfolio your break even was two to three years.  These things do happen.  These things are things that are hard to see and people who say well I saw it and it was so obvious and maybe even they say I moved to cash because I knew it was going to happen, my experience over the last 27 almost 28 years is those people who say that probably moved out a little too early and they don’t get back in.  Yes they might feel all good and all happy with themselves that they moved out, but the better strategy, as I see it, is to stick with the strategy that you have, which was for a long-term. If you need the money next month that’s a problem, you shouldn’t have investments to begin with.  However, we look at our life like a business and we have to make decisions, not emotionally, as it relates to things as well.

I’m always here.  Mike Brady; Generositywealth.com.  Please go and watch some of my other videos.  I’m going to provide some links to them as well, but Generositywealth.com; Mike Brady; 303-747-6455.  Hope you had a wonderful Christmas.  You’re probably receiving this after Christmas to a happy new year.  Thank you.  Bye bye.

Investing And Life Are More Like Poker Than Chess

Investing And Life Are More Like Poker Than Chess

“Success is nothing more than a few simple disciplines, practiced every day.” – Jim Rohn

Investing and life are more like poker than chess. I recently listened to an interview with Annie Duke. Ms. Duke’s book, Thinking in Bets along with the interview really resonate with me because her thinking is quite similar to mine.

In this quick video, I detail the parallels of investing and poker and why it is critical to keep a “poker face,” keeping your emotional composure during bad….and even good investment periods!

About Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts

Thinking In Bets Book Cover

Annie Duke, a former World Series of Poker champion turned business consultant, draws on examples from business, sports, politics, and (of course) poker to share tools anyone can use to embrace uncertainty and make better decisions.

I like this book for many reasons, the greatest one being the statement, “Even the best decision doesn’t yield the best outcome every time.” In poker, like in investing, you can make the best decisions but there are still unknown elements at play.

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Transcript of the video:

Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full service financial firm headquartered right here in Boulder, Colorado. 

Today I want to talk about how investing and life is more like poker than it is chess. I got a lot of these ideas I’m going to share with you today from an interview and a book that I read by Annie Duke. I’m going to put a link in the newsletter and in the transcript of this. (http://a.co/aw2KM5f) Annie Duke, Thinking in Bets.

And when I heard her interview on this podcast it was like she was speaking right to me because that’s the way I think. And so of course I thought she was brilliant. If you watch my videos going back seven, eight, nine years you’ll hear that I talk in well let’s increase our probability of success. And I think the odds are because that’s really the way life and investing is. Let’s think about chess for a second. Chess there’s these pieces on the board and all of them are visible. You see it and so does your opponent. With all that visibility it’s a completely logical game. The person who is the more experienced, the person who is the better player should always win. And if that person doesn’t win then they can go back piece by piece or play by play and say oh, this is where I made a mistake.

That’s not the case with poker. Let’s talk about poker for a bit. You don’t get to see all the cards so there’s a hidden element there. It’s all a bunch of odds. You might have an 85 percent probability, 90 percent. But there’s still 10 percent that you could be wrong. And it doesn’t mean that you were wrong because the outcome went against you. But there were things that you didn’t know. There were unforeseen things and there is luck. I’m not going to ask you to raise your hand but if I was to say who has run a red light, most of us would raise our hand. Even if it’s only once in our life or if it’s once a day. Just because you run a red light doesn’t mean you automatically get hit although it dramatically increases your odds of getting hit. Just like if you’re following the rules and you go through a green light it doesn’t guarantee that you won’t get hit, T-boned by somebody else. So there are factors outside of our control that we have to understand.

When we’re looking at a poker game, a typical poker hand a professional might take two minutes. Therefore, you might have 30 hands in an hour. And a professional poker player is going to know the odds. They have to work really hard to know the odds, play the game, to be cool. Maybe there’s a string of bad luck that you have but you stick to your particular core knowing that you’re a really good player. You know the odds better than the people that you’re playing against and you just can’t get too emotional one way or the other. If you’ve ever seen a poker game nobody’s jumping up and down when they win or at two, three or four hands they’re getting super depressed. Maybe amateurs are but definitely not the professionals.

So investing is very similar. We can do the best that we can with all the different variables that are known to us we can come up with a strategy. We can say wow, I think the market is going to do this, I think the market is going to do that. And we could be wrong because there are going to be things that are unforeseen that are going to be in the future. Nobody knows the future. So that by definition is going to be a variable that we’re not able to account for fully. Therefore, what do we do? What we do is we, of course, look at a diversified portfolio. We say well how can I not stick my neck out so much that if that 10 percent or that 20 percent or whatever the number is that I’m wrong, I’m really stuck that I’ve lost so much. How much are you willing to risk? So a diversified portfolio is very, very important. Staying in it for the long term. If you find your strategy that works with your risk level, your tolerance, that allows you to stay emotionally cool it’s got to be a long term. If you were a poker player it might be many hours. If you are an investor it should be many years. And so you’ve got to keep that in mind as well.

Life is full of unknown variables so we try to increase our knowledge. We try to increase it so we can make the best decisions. We try to learn from those decisions as well. It is not a chess game. It’s not a guarantee. So if you’re looking for a guarantee then investing in life, you know, you’ve come to the wrong place so you’re never going to get that and you’re going to be continually disappointed.

Mike Brady, Generosity Wealth Management, 303-747-6455. You have a great day. Thanks. Bye bye.

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Russian Ruble Crisis:  Don’t Panic like it’s 1998

Russian Ruble Crisis: Don’t Panic like it’s 1998

I remember the 1998 Russian crisis well.  It was near the end of the summer, and threatened to put a real damper on an otherwise excellent stock market year.   The “Moscow meltdown” bled over the S&P 500, which plunged 20%.Russia 98-14

There are reasons  1998 and today are different

  1. Tough sanction in place have somewhat isolated Western investors
  2. Russia has a war chest of $416 billion in currency reserves today, versus very little in 1998
  3. Russia’s currency is free floating, and not pegged to the US Dollar like in 1998.  External shocks can be absorbed by the currency markets.

There are other worries in the world we can be concerned about, but Russia collapsing and spilling over to us like 1998 isn’t one of them.

Dont Panic like it’s 1998 – Full Article

The Big Picture

The 3rd Quarter was schizophrenic, with most of the unmanaged US and international stock indexes negative, bonds (in general) slightly positive, and with tons of volatility across the board.

Particularly in the past few weeks, every day there seems to be triple digit swings in the Dow, and lots of negative news (ISIS, Ebola, etc.).

Now is the time when we have to remember the big picture and what we as investors are striving towards.  It is the time when emotions can be high, but we need to keep a steady hand and focus.  Now is when we reaffirm what our goals are and whether information that we’re being given is something to be alarmed about, or the normal course of a market.

I address these “big picture” issues in my video this week.

Transcript:

Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full-service wealth management company headquartered right here in Boulder, Colorado.

Today I want to talk about where we are so far this year, of course including the third quarter of 2014, and also the next quarter where we are presently. Let me expand a little bit into the next 18 months or so, but before I do all of that I want to kind of look at the big picture. For us to examine why it is that we’re even doing this.

I like to think of investing as taking three steps forward, two steps back; or four steps forward, three steps back. There are people who will say – no, no, no; I have this wonderful program that’s really exciting, it’s sexy and it’s very tantalizing to say, but we know that that’s bad. If we look at all the particular investments that are out there they always have some kind of a jagged edge, meaning that they go up and they get some down, and then go up, and get some down. That’s a part of it. It’s part of this stuff that I was talking about – four steps forward, three steps back. The time that there are steps backwards it’s so uncomfortable and if you are so focused on that then you’ll never have the joy of the steps forward. Those steps back might be one quarter, might be one year, might be a couple of years. Historically in just the last 15 years or so, year 2000, 2001, 2002; those were three down years right in a row; 2008 was a very painful down year and 2011 we had a really painful third quarter of that year, but in general it was pretty much just a breakeven year in general. The last four, five, even six years or so, not counting 2008, but since 2008 we’ve had a generally trending up market. That’s not always the case. This is nice that we’ve had these steps forward and relatively few steps backwards. As a matter of fact, it’s so unusual right now that when it happens we start to get concerned. We’re like – Oh my gosh, this is Armageddon. It’s good for us to sit back, relax and say – okay, is this new information?, is this new data relevant enough that it changes my perspective?, that wow, it’s such a headwind that I don’t think I’m going to be able to go forward anymore like I have been able to, or is this just static?, is this just chaos out there that’s normal for the market?

I’m going to jump right to the conclusion and tell you that I think it’s the latter. We have enjoyed a relatively calm situation the last five to six years. Any kind of a disruption of the Dow, 100, 200, 250 or so; that has been happening since the Dow was at 10,000 and 11,000 and 12,000 and 13,000 and now it’s in the 16,000 and 17,000 range and all along the way there were people who were saying – no, it can’t get any higher, well, we’re always at a high, it’s going to go down, etc.   That’s not necessarily the case. Why else would we be invested in the market if we didn’t believe that sometime in the future it’s going to be higher than it is today. If we didn’t believe that, than we should just keep our money in a safe, or the mattress, or someplace else where we can have absolutely no principal loss. What we can do as investors is really watch our emotions and be the smart money (I’m going to put my quotes up there), the smart money because emotions cause your average investor, I would even say some of your professional investors to do the wrong things at the wrong time. When we look at money flows in and out of the market you’ll notice that 1999 everyone was so ecstatic. I mean emotions were so very high on the technology and so much money was going in basically at a high. At the end of 2008, the beginning of 2009 as we look at the market that was actually the perfect time to buy, but nobody wanted to buy at those points. Everybody was rushing to the door when really they were selling at the bottom and real people unfortunately buy at the top, which is what we don’t want to do. That’s why it’s good for us to keep a long-term vision of what’s going on and not be too distracted by the day-to-day, I would even say the month and the quarterly numbers and have good managers, good goals, a good plan that takes into consideration macro events and stick to that.

Sometimes the most difficult thing to do is actually do nothing, or to not overreact. It’s sort of like if you are in a car and you’re on some icy road and you’re trying to get to a certain destination, the wind is blowing you left and right, a real experienced driver is not going to overcorrect one way or the other. Yes, there’s going to be minor corrections. Yes, you are going to be very diligent in how you get to that destination down the road, but you are also going to understand – hey, wait a second, this gust is just happening. It’s going to go away and I believe that by not overreacting I’m actually long-term going to be better for myself.

This is what my 23 years of experience has shown me is that we watch out for some of the kind of sexy things that could be out there. I’ve got to tell you I’ve sometimes been real enticed by a promise of the highest return out there with no volatility. I’ve seen these things and I just don’t believe that they’re right for my clients and particularly at this particular moment in time. A good composition of stock funds, bond funds, cash, a smattering of potentially some non-traded REITs may have a place for a client if it makes sense. Of course, don’t do anything until you either talk with me, or if you’re my client to see if it made sense. This is very, very broad that I’m talking about. I really like some Business Development Companies, BDCs that are out there that can add some extra yields as well. One statistic that I do want to throw out there is just to kind of give an example of the environment that we’re in, is back in 2007, October of 2007, the yield on a bond was such that if you needed $1000 worth of income, how much do you think you would have to invest in order to get that $1000? About $24,000. What about five years later, in 2012, October. To get that same $1000 worth of income, how much money would you have to be invested in? — $3.3 million is the answer. It’s so big because the yield went from 4% all the way down to practically zero, literally almost zero.

When we look at all the various options out there in order to make money. There are bonds out there. There’s real estate. There are stock investments, etc. If you’re looking for a perfect answer, there simply isn’t one. One of the parts of I think adult life is understanding that there are many times imperfect choices. We see this every time we go to the polls for an election. No politician, no party (in my belief, maybe you think differently) is perfect. There’s always something that you disagree with them about. Therefore, we’re picking the best of our options that are available to us. Well, it’s the same way from an investing point of view. You’ve got your bonds. You’ve got your stocks. You’ve got your cash. You’ve got your real estate. You’ve got your alternatives, etc. and each one has pros and cons and it’s determining which one is right for you. The yield that you are getting on bonds, very, very low, but I think it’s part of a portfolio of a diversified portfolio. The yields on CDs and money market are down to practically nothing. As we’re invested in the stock market for the long run, one of the things that comes with that, one of the disadvantages is a little bit more volatility. We don’t have a guarantee of principal, so we’ve got to be smart; we’ve got to be diversified. Although that doesn’t guarantee in a generally trending down market that you won’t experience some losses, but we want to be diversified in order to tamper down some of that volatility.

As I started out the video talking about taking four steps forward and three steps back. Well, if you want to run and take 10 steps forward up, that’s okay. You just take the risk of sometimes taking nine steps backwards. That’s not necessarily what everyone ought to do and I think I want to bring some realism into what our expectations should be.

Warren Buffet, one of the most successful managers out there, over time he had averaged a little over 8% per year. For us to expect in the teens or in the 20s every single year is an unrealistic expectation and you will be disappointed and might cause you to do the wrong thing, which is to try to chase something or someone who is going to promise you something that long-term isn’t going to last. While Warren Buffet was making that 8% return he had time. Just in the last 20, 25 years we had 50% declines to you and so I think that that’s a very uncomfortable situation. I personally don’t want to position myself with client portfolios where we have that kind of volatility and so I think by having a good diversified portfolio with good managers long-term, we can hopefully start to narrow that band of – and unfortunately sometime giving up some of those high-highs to getting some of the low-lows as well.   So far this year markets are plus or minus a few percent depending on what stock market index you want to look at. The bond market is positive for this year. I think going out 18 months we will continue to have a good market. When I look at the yield curve, which is still a normal yield curve, which is great, it’s not inverted. I’m going to throw up some graphs up on there as well. When I look at where we are from a quantitative easing that has been easing off and will continue to go down to zero. I’ve been actually surprised we haven’t had more reaction to it. When we look at the fundamentals, the fundamentals are so strong. Huge cash balances which are wonderful from the balance sheets of corporations point of view. I think that the fundamentals have not changed in three or four months. Yes, things are slowing down a little bit. I don’t want to sit here and say that everything is wonderful. I want to make sure that I don’t give the impression of being Pollyannaish and saying everything is perfect and wonderful out there. If you’re looking for a perfect world, if you are ever looking for the perfect storm in a positive direction, you are never going to get it. You are going to be disappointed every single time. Therefore, we have to look it and say on balance is there 51% more good than negative, and if that’s the case then we adjust accordingly, and we say, yeah we’re optimistic for the next quarter and maybe even the next 18 months.

I’m always open to feedback. I’m always open to a different point of view. Please give me a call if you would like.

One thing to watch out for is that we don’t get so negative that we have these scenarios that we’re afraid to move forward and some things that might be volatile that are not certain, but then we put ourselves in such a situation where we want a warm fuzzy blanket and it costs us an awful lot for that. Anything is possible out there. The question is what’s the probability? I really deal with probabilities more than I do even possibilities, and yes there’s always those curves and those black swans, etc. One of the reasons why they call it black swans is they’re so, so very unique and yet they can be devastating, but we can’t live our lives by only focusing on the absolute worst that can happen. We have to prepare ourselves for that, but we also have to live within what’s probably out there.

Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful day. Thanks.