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.
Tensions with Russia, slowing global growth and falling consumer confidence mean the region’s biggest economy struggled to grow in the past 3 months, and may turn out to have shrunk for a 2nd quarter running.
Across the Eurozone as a whole, recently released data showed that economic sentiment dipped in September for a 4th month in a row.
Questions abound about whether this could lead into a vicious circle of falling prices and stagnation.
I’ll continue to watch this closely and make some macro recommendations for my clients as this continues to unfold.
The 2nd quarter is now behind us, and the momentum is with us! Will recent global political events derail the positive trend?
Good question, and one I answer in the below video
Transcript:
Hi there, Mike Brady with Generosity Wealth Management, a comprehensive, full service, wealth management firm headquarters right here in Boulder, Colorado. Today, I want to talk about the second quarter review. Really kind of the first half of the year review and then a third quarter preview which really turns into the rest of the year preview as well.
The first quarter of this year, we had some drops in January and February. Some people were saying, okay. This is after a strong 2013 that means 2014 is going to be negative or really hard. Well, March came back and the first quarter of this year really was break even to positive just a little bit. Now, when we go into April, May, and June which is kind of the second quarter, it continued to be a very strong stock market. The unmanaged stock market index, the Dow Jones Industrial which is the one that we hear about the most, is up about 1.5% for the year, but when we actually go to a broader basket of stock, whether it be S&P 500 or other indexes, you are really looking at the first half of this year being between 2% and maybe 8% or 9% depending on what index you are looking at. These are for unmanaged stock market indexes.
I am going to throw up there on your screen a particular chart that shows what the S&P 500 has done over the last 17 years or so. You are going to see since 2009 the market has, without major interruptions, gone straight up, so it’s really been a very strong market and one that I have to say if we were talking in March of 2009 after seeing the fourth quarter of 2008, remember how 2008 was so difficult, who would have thought that things would have just skyrocketed ever since then, but yet, that is exactly what has happened. It’s a good lesson in humility that when everybody else is so certain that it’s going to continue to go down, many times that’s a buying opportunity.
I want to throw another chart up on your screen. You are going to see that the price to earnings ratio in general is a little bit more expensive than the average of where it was one year ago. It does not mean that it is ready to decline, but I’m just saying that it is not as quite the bargain that it was a year ago or even on average. When we look at the late 1990s right before the big crash of 2000, 2001, and 2002, many of the markets were having the PE ratios in the 20s, 28 or 29 stuff like that, and the NASDAQ was off the charts, almost 100, so I do want to keep everything in perspective.
We will go to the next chart and there you are going to see that the earnings per share are looking really good and profit margins as well are looking really strong for companies. In general, I think things are disturbing that last quarter there was a negative or contraction in the GDP, the Growth Domestic Product, I think that it’s something we have to really watch out for. One thing that is good about it though is if it stays difficult I think that the fed is going to have even more of an incentive to keep interest rates low. Remember when we had quantitative easing and they were buying a year ago $85 billion worth of bonds which was keep a lot of liquidity in the market. Well now they are doing $35 billion a month and by the fall of this year according to the June meeting notes, they might even stop the purchasing all together. Now there is an awful lot of liquidity in there. I don’t think that this is going to be a huge interruption and disruption to the market, but it is something that we need to keep in mind. Now, even if they stop, I think that the interest rate increases will be very, very gradual and very, very slow.
I am going to throw another chart up on the graph and you are going to see the corporate cash is very high as an economy and we are going to see on the next sheet there that it is normal for there to be decline throughout the year, so we have had already about a 6% decline in the market. That was through January and February which is actually about a normal, even actually on the low side of volatility. As we go forward, there might be some more volatility, let’s hope that there’s not, but so far the year is looking really nice.
Now, I am going to throw this next chart up on the graph and that’s going to show you since 1900, so that’s 114 years of course, and you can see that there has been a breakout. It has a tendency to have the consolidation period and then some advances. Of course, in the 1930s there was a decline, a huge multiple year decline, but when we do these trend lines you are going to see that there is periods of consolidation and then a breakout. In my opinion, I think that I am very bullish on the market on the United States and I think that this is something that is going to be before long laughing. That being said, we don’t live in just a stock world. There are other asset classes as well.
Let’s go to the next graph and you are going to see that apartment real estate, in particular is what I am talking about, apartment vacancies is at bottom line here. That’s a good thing. You want vacancies to be really, really low, and so when you can see that office vacancies have increased a little bit through 2009 and 2010, but have been coming down since then, you’ve got retail, industrial, and apartment, and apartment is looking the best from a real estate point of view, from at least a vacancy point of view. Of course, you got to get them at really good pricing and things of that nature.
We are going to go on to fixed income which are bonds. We are in a low yielding environment, so there is a lot of chasing of yield, so people are trying to get a higher and higher number. Right now, just to show you, you can get the two year treasury at only at .5%, all the way up to 30 year so far is year-to-date is yielding 3.34%, but if you would have bought it, it was so depressed last year that it actually has increased in value this year into the double digits. Frankly, last year big dog was one of the worst performing sector is this year’s performance. That’s the reason why you want to have, put my hands up here, stock and bonds. You want to mix them all together. In a perfect world, you’d have sometimes the stock pull up the bonds, sometimes the bonds pull up the stock. Here we have both of them going up together which is actually really good. Believe it or not, the bonds are pulling up. If you have a high bond allocation, they are actually pulling up the stock portion of your portfolio so far this year where as last year it dropped it down which is kind of interesting.
From a global market point of view, I am going to throw a chart on there. The important thing to know about this chart is in comparison to historical averages, much of the developed world is expensive from a market point of view. Of course, we just went through the price earnings ratio for the U.S., and that, I already showed you, was a little bit higher than the average while many of the developed countries are the same way. Now, when we go out to the emerging market which is the next sheet there, you are going to see that there is some real bargains there with Russia and China, but of course we have political instability there, political instability as in the – in my opinion, how much can you trust it, things of that nature. Are the real numbers true, etc. Maybe they are not political instability as in they are practically dictatorships, but that’s beside the point. When we look at some of the other emerging markets, they too have a tendency to be a little pricey.
Let me end up here by saying I continue to be positive for the rest of the year. As a matter of fact, I have a tendency to be positive for the next couple of years, and I think we need to have a well-diversified portfolio, but be a part of it. Keeping money on cash or CDs is absolutely not the right solution, in my opinion. Time is on our side, so I am going to put a chart up there and what this chart really means is from 1 year to 5 years to 10 years to 20 years, the farther out you go historically looking back all the way back to 1950 and it could be different in the future of course, that the longer you can be invested from 5 years, 10 years, all the way up to 20 years, you’re range of returns, the high-highs were because there are some higher loads as well and so they have the tendency to get into a range there. Over time, there actually hasn’t been a 5, 10, or 20 year timeframe where a 50/50 portfolio of stocks and bonds has actually lost money. That absolutely could happen in the future and so I just want to be realistic about that. However, what we are trying to do is, of course, trying to set ourselves for success so that the super low-lows we can try to trim those so that we stay invested and that we don’t let our emotions run wild. Of course, we would love to have the high-highs, but unfortunately, the downside of being diversified is the downs, the lows have a tendency to bring some of those highs down as well.
That being said, I continue to be optimistic for the rest of this year and even going into 2015 with the Presidential Election. That’s what I got. Hope this wasn’t a little too long. Hopefully you listened through the entire thing. My name is Mike Brady, Generosity Wealth Management. Give me a call if I can help in any way, 303-747-6455. Thanks.
When you hear 9 – 10% in the stock market, you must remember that those returns contain every single type of market environment.
Warren Buffet is one of the most successful investors ever, and he still has declines at some point. But, he has the right behaviors ingrained in him to “be greedy when others are fearful, and fearful when others are greedy”.
No one likes declines, but they are part of a full market cycle. When constructing a portfolio for a client, I always try to understand the risk tolerance for them, understanding that unless you’re 100% invested in the stock market, you won’t get 100% of the ups (desired) and downs (undesirable) of that market
One thing to watch out for is assuming the future will reflect the past. As a matter of fact, that whole “past performance is no guarantee of future result” is actually true.
So, looking at history over the past 14 to 15 years, what would happen with your returns and volatility if you had invested for the year based on the best asset class for the prior year?
Inquiring minds want to know.
Therefore, you should watch my video.
Hi there, Mike Brady with Generosity Wealth Management, a comprehensive full service wealth management firm headquartered right here in Boulder, Colorado. Today I want to talk about volatility, I want to talk about diversification and picking an asset class based on the prior year’s returns.
I was at a conference maybe two weeks ago, three weeks ago, something like that and this presenter had these charts, which I’m going to share with you today, that I thought were so fascinating. A lot of it has to do with setting yourself up for success. You’ve heard this if you’re watching my videos, as I certainly hope that you are, about setting yourself up for success because I’ve heard I just want the highest return, volatility doesn’t matter.
Well, my experience has been that volatility only matters when you’re right in the middle of it and it’s happening to you. Therefore, let’s set ourselves up for that success. I’m going to throw up here on the chart an example of all kinds of asset classes that you could have been in. You go back all those years and all the different colors and each one of them are stocks and bonds and international and commodities and all different types of asset classes. Now, let’s pretend like we’ve invested, so the highest one for each one of those years keeps changing because you can see that top row there the color keeps changing. If we took the previous year’s highest, the one who won for that year, and you invest in it the next year, what do you think would happen with your returns?
Well, this chart that I just threw up on the video will show you that the blue line there and this is a little bit cherry picking because this goes back to the beginning of 2000 and if you remember at that time it was right after the internet craze and I remember, I mean I’ve been doing this for 23 years, and the confidence level of all these people were oh my God, you’ve got to get into internet and you’ve got to do this, look at how great it did in ’97, ’98, ’99, I mean you’re a fool if you don’t do this. If you had done that, look at that blue line, the blue line is for the last 13 years if you had picked and invested your money into the previous year’s best asset class that’s what happens, okay. The red is if you invest in the worst asset class for the previous year, but if you invest in a diversified global diversified, meaning global stocks and bonds and some cash, then you’ve got that green one right in the middle. It’s not as good as going right into the worst. It’s definitely better than going into the best, but it also is a slightly smoother ride, which is absolutely essential.
This next graph I think is really interesting in that the red is the 100% stock market index. What would happen if you got only 50% of the decline so if it went down 50, you went down 25, and you only got 50% of the up so that it went twice as much up as you did, you would have that green versus the red, so the red is what you would have if it was $1000 or a million, it doesn’t really matter, but you would have a much higher rate of return with a lot less volatility just by having half of the down and half of the up because if you recall losing 50% means you have to have a 100% return just to break even. If you have $100 and you lose 50, that’s $50. You have to make 50 on 50 just to break even. If you lose 20% you have to make 25 just to get back, lose 33 you’ve got to make 50, that’s just the way math works.
There was one other chart that I really wanted to share with you. This chart right up there, this is my last one for the day, which is on the right-hand side there, the question is the cycle of emotion. You go through some caution, some confidence, enthusiasm and greed, and then you go to indifference, denial, etc., all the way down there, so our emotions. I’m a behavioral finance guy who’s interested in that, that some of the nontechnical aspects that we bring to investing are as important, if not more important than some of the technical aspects. I just acknowledge that and so I’m always wanting to set ourselves up for success. These are the types of things that I talk with clients about all the time and if you are not one of my clients I’d love to talk with you about it.
Mike Brady, Generosity Wealth Management, 303-747-6455. Have a great week. We’ll talk to you later. Bye-bye.
