Sorry in advance for a longer than usual video this month (7.5 minutes), but I have some charts and graphs in there to provide some context for the slow ride down in the un-managed stock market indexes that we saw for May.
The question we always have to ask ourselves is “what is this telling us?” and “what does this mean for the future?”.
Click to watch my video.
TRANSCRIPT:
Good morning, Mike Brady with Generosity Wealth Management speaking to you from Boulder, Colorado. And today I want to talk about what’s been going on in the markets; what’s happening in Europe, how that’s affecting things in the United States; kind of the United States by itself. But really, kind of what’s happened in the markets in the last month or so. I mean the unmanaged stock indexes in the last month or so are down about ten per cent and this is the third time in twelve months that we’ve seen within the space of a month a ten per cent decline, or so.
One thing that makes this May different is that it was a kind of slow steady decline versus lots of volatility. I mean if we look back to just last summer, remember when there were four and five and six hundred point swings on a daily basis. We just didn’t have that this past May.
Unfortunately, the last month has wiped out some of the gains that we had accumulated in the first quarter of this year. Just to provide some context the markets are actually still positive for the year, the unmanaged stock market indexes. So, the question you might ask yourself is, OK, we’ve had low volatility in May, it’s been a decline in the month. The optimist in you might say, well, the market is reading this, the market has actually done quite well over the last three or four years since March of ’09, and this is just kind of a step back, and it’s reading the market and it’s not freaking out. The pessimist in you might look at Europe and all the bad news there, how is that summer of discontent going to affect the global markets, the U.S. markets and what’s going to happen with the European Monetary Union, our continued bad job markets throughout the summer leading up in to the election etcetera? And say, “Wow, this is just the beginning. I’m looking at a big crevice before us, I’m looking at the abyss and I certainly don’t like it and I feel uncomfortable with it.”
One of the reasons we have long term diversified strategies, and hopefully you have one, is because that’s an investment, a conscious investment, in the future, saying that “I’m going to take three steps forward and one step back.” Maybe five steps forward and three steps back, however it is. But over the … why would you invest in something if you believe that long term that it’s not going to be greater in the future than it is now? Now I could sit here and show all kinds of studies which show that having exposure, having a well-diversified portfolio, is in the investor’s best interest as you’re reaching your retirement goals or as you’re in retirement, maintaining your principal and some income going forward.
But as we look at that, I’m going to throw up a chart here, on the screen and what you’ll see is intra-year declines are something that have always happened. And it’s not uncommon for there to be double digit returns. I’m going to circle a couple of them up on the screen. But what you’ll see is that does not mean that the year ends negative. So don’t write off this whole year just because it’s June and the markets, although they’re only slightly positive they’re not double digits or maybe what you would like. And so there’s more than fifty per cent of the year before us even though May has not been very favorable.
I happen to be a contrarian at heart and one thing that…, I’m going to throw a chart up here, is the equity allocation, the recommended equity allocation when it’s very high percentage, you’ll notice that it is kind of market tops, there at about 2000. A lot of times when people do not want to have an equity allocation, like March of ’09, is exactly when you want to do it. Let’s keep it in perspective that since March of ’09, the market, as of last quarter was up well over 100 per cent in an unmanaged stock market index.
One thing that you want to consider as well is having a very well diversified portfolio, including bonds both government and corporate. They have a tendency to reduce your volatility, of an individual portfolio. That’s why you have an asset allocation. That’s why you have a diversification. But you make various “tilts”, I might say, throughout the year. And that’s what I do on my clients’ behalf.
So, let me summarize here real quickly; the market in May has been very difficult. The question we have to ask ourselves is, “what does that lead us, what conclusion does that lead us through the summer and through the rest of the year?”
I stand by my conviction, which I gave at the beginning of the year, this is going to be a positive year. And the reason why I do that, even with all the negative information out there, OK, I hear it OK? And I certainly hope I don’t give off the impression that I’m stubborn. It’s like, “No, no, Mike won’t… data’s changing and he’s not changing.” Which at my last video I said, “Hey, I’m really concerned about things going forward.” And I think I was right in the last two or three weeks or so that there has been a weakening. But the reason why I am optimistic is still because of the strength, as I see it, in our companies that have fortified themselves against very uncertain times and some bad information going forward, OK?
If I am wrong, that’s why we remain diversified. And that’s why we keep our eye on the long term goal and have diversification, OK? You’ve got to have a good portfolio. But that being said, I don’t think I’m wrong. Why would I say something if I thought I was wrong? But I also have to have the humility, and every investor needs to have the humility, and you don’t bet all on one particular thing.
So, I am still optimistic for the year. I’m not changing my allocations in general at this point. I am not freaked out as in; the world is going to end this particular summer. I do believe the volatility is going to continue to be greater now than it was in the first quarter of this year. But I don’t believe, as I see it, as I do my analysis, that we’re going to see the kind of volatility that we saw last August.
There is a lot of data that’s going to come out this summer. Europe is still going to be the big news and so we have to watch that but we also have to keep it [take it] with a grain of salt; about how that’s going to affect us.
One thing that I continue to be concerned about is the coupling of Europe, the disappointing news out of Europe, and the disappointing economic, kind of macro-economic news out of the United States. I think that that’s a real disturbing trend. And of course, I continue to watch China as their numbers have faltered as well.
That being said, I’m holding true right now with the allocations that I have for my clients. If you need assistance, if you want a second opinion, I’m happy to give that to you. I certainly hope that you have a plan as well, that’s a multiple year plan about how to reach your goals and kind of live, reach your goals. Live within retirement at the lifestyle which you would like.
Anyway, Mike Brady, Generosity Wealth Management. Sorry this video’s been a little bit longer but hopefully I’ve given some good data in there as well and some good thoughts for you. Give me a call if you have any questions, 303.747.6455, and we’ll talk to you later, thanks, bye bye.
There are few things the stock and bond markets hate more than uncertainty. Currently, part of that uncertainty is the unraveling of the European Monetary Union and the impact that will have on us here in the United States.
Since the beginning of the year (see January and April videos in particular) I have been optimistic, but I have to say my enthusiasm for this market is waning. The summer months, historically difficult in themselves, have me concerned with lower GDP numbers, continued unemployment leading to the election, but most importantly concerns about the debt problem in Europe and domestically.
I’m adjusting my portfolios accordingly.
Click to watch my video.
TRANSCRIPT:
Good morning, Mike Brady with Generosity Wealth Management speaking to you from my offices in here Boulder, Colorado. And I’m recording this on a Friday evening, originally I had a couple of topics I wanted to talk to you about but so much has been in the news recently about consistently down days in the market; J.P. Morgan Chase losing two billion dollars on their propriety trading desk; Europe, France just had an election. Then I wanted to share with you my analysis, kind of my thoughts about that because up till now I’ve been optimistic and data changes, it’s not that I’m not optimistic. As a matter of fact I’m still feeling very good about getting rid of that uncertainty of the presidential election one way or the other. But this summer some more uncertainty has been introduced, I think, to the system, to the world, to our analysis that causes me to really look at things very closely. And this is what I’ve been doing in the last week or so, and will be continuing in the near future.
One of the reasons why I was optimistic is increasing profit margins in our businesses, kind of corporate America. Their very large cash balance sheets ready to deploy when they feel there will be less uncertainty. Because they will deploy in research and development and new staff and new infrastructure but they’ve got to have some kind of confidence that will come back to them in a rate of return. Completely reasonable.
But right now Europe really is becoming a sore spot and that has me concerned as we’re going into the uncertain months of summer. Spain, just to give a little bit of perspective; it’s the fourth largest economy in Europe and the twelfth largest in the world. It currently has twenty-four percent unemployment, and among Spanish youth over fifty percent unemployment. How is this really going to affect Europe? And how is Europe really going to renegotiate some of the arrangements of the European Monetary Union, etc., in the coming months? I don’t know. I don’t know any more than you do but what I will say is I’m reading this stuff and I’m analyzing it very closely and I’m coming to some conclusions that—the uncertainty has me concerned. So I’m decreasing my percentages in the international in general and it’s something I’m watching very, very closely. And I’ll continue to report to you how I’m thinking.
Just to put some perspective on where the markets have been, I’m going to throw up on the screen there (a chart) the Dow Jones for about the last twelve months. And what you’ll see is that although the last four to six weeks have been down and volatile and increased volatility etc. In a long term diversified portfolio, having that strategy- you’re still positive for the year in an unmanaged index.
It’s good to have that because these things that are happening right now, most recently, are always going to happen. The market is cyclical and we can’t get too concerned, too freaked out when it does happen but what we can do is reassess with new data coming in—where should we go? And where should we be, where should we tilt, one way or the other as we’re going forward?
Anyway, if you’re my client you know I talk to you all the time. Of course I want to hear from you if you have any questions or concerns after my video here today. If you’re not my client, if you want a second opinion on what you’re doing I’d be happy to do that. It would be my pleasure.
Mike Brady, Generosity Wealth Management, 303-747-6455, you have a wonderful week. Thanks! Bye, bye.
John Mauldin is one of my favorite newsletter writers.
This week’s newsletter speaks exactly to what my video above addresses–the elephant in the investment room is Europe.
I highly encourage you to set aside 10 minutes to read this weekend’s newsletter. It goes into greater depth than I can in the 3 to 4 minutes for my video.
Europe is the concern as we enter the dull summer months.
I’m asked periodically what I think of “market timing” or “active management” versus a straight buy and hold philosophy.
My first response is usually to ask for a definition of those terms. While it may be obvious to the person asking the question, if you ask 3 people you’ll get 3 different answers.
In this week’s video, I propose some definitions, but also share that while I think active management is preferable over your traditional buy & hold, market timing is great in theory but hard to execute in the real world.
Click to watch my video.
TRANSCRIPT:
Good morning! Mike Brady with Generosity Wealth Management and today I want to talk about active management; and what’s the role of that, what’s the place in someone’s portfolio; and frankly can “timing” be done, and done successfully?
Let me just tell you that in a previous life, a different company that I was involved in the late 90’s and early 2000’s, we were known as the market timing firm. And we were extremely successful at that. And so, I know first-hand that market timing, with the right players and in the right environment, can be very successful. However, most people cannot market time on their own. And market timing, traditionally is meant to be when to go in and out of the market, whether it’s short term; meaning a day or two or a week or even longer term; month, quarter or year; going between stocks and bonds and cash, etc. whether that’s with mutual funds, etc. That’s kind of a traditional discussion of market timing. You know, I think that those that can successfully market time are very small. But I do believe it can be done it’s just very, very difficult. And it is extremely difficult for an individual investor to do it on their own, on their own portfolio. I use an example, whenever I need some legal work done, if I try to do it myself, I’m not going to be successful. Does that mean that legal work is not successful? No. I have to go to a lawyer, someone who is trained and is unemotional about the particular problem or issue that I might have. But, as Mark Twain said, “A lawyer who represents himself has a fool for a client.” Well, what he’s really saying is a lawyer should not represent himself. So it’s very difficult when you’re emotional about an issue to handle it on your own. That’s why I think a professional adviser makes sense even if that person is doing some market timing.
I do allocations within sectors. And I’m usually almost always invested but I’m trying to weight, kind of tilt, one sector over another; whether it’s large cap, small cap, or mid-cap. What I don’t do is go 100% stock one day and 100% cash the next day, or even week by week. I think that that is a skill that is extremely hard to do and a lot of times it just isn’t very successful. I’m not sure that the environment today is the same environment that it was ten and twenty years ago.
Unfortunately, the statistics out there show that investors who try to time the market on their own are 20% less successful than if they had just done a “buy-and-hold.” (Source: Barry Mendelson, CIMA, CMC EResearch, “Dangers of Market Timing,” 4/29/2008.) And once investors become active, this study that I just read a week or two ago, says that 40% admit that they’re probably too active and that they’ve hurt themselves. (Source: Helen Modly, CFP, CWPA, Focus Wealth Management, Ltd., “How the Wealthy Avoid Behavioral Bias: 7 Strategies,” 2/13/2012.) So, I do, … I’m kind of giving a “waffle-y” answer here; I do believe it’s possible, it is extremely difficult. I believe that a better solution is probably to be well diversified and to tilt particular sectors one way or the other and be very well diversified. I do work with some good managers that I’m very pleased with their particular approach and I’d be happy to talk with you about them and the way that they manage money, not in a market timing situation but in a good active management situation where it’s deciding what are the “tilts” and the “weights” of that particular diversification.
Hopefully this video made sense and clarified things a little bit; either way, give me a call if you’d like to talk about it. I just absolutely love hearing from you and hearing from your friends. So pass it on to someone if you think that they could have some value from this video. 303-747-6455, my name is Mike Brady, here in Boulder, Colorado. You have a wonderful, wonderful week. Thanks! Bye, bye.
If you’ve been following my newsletters over the years, you know I believe in diversification and that one of the key ingredients to reaching your goals is to avoid catastrophic financial events.
It’s important to note, as the table above illustrates, that not every investment has to make money. Limiting the size and number of the losses is important, and if avoiding any kind of loss at any time is your strategy, then you’ll always be on the sidelines.
Risk management is key, and with that it is understanding some investments will do different things at different times, and not all will be winners in each time frame. Keeping your eye on both winners and losers and replacing them when necessary is a standard ingredient in prudent portfolio management.
The first quarter of this year was very forgiving of any errors. We’ve had low volatility, generally positive economic reports, and even Europe has been less in the news than previously.
Watch my video for my thoughts about the 1st quarter, and to find out if I’m still optimistic for the 2nd quarter and rest of the year.
TRANSCRIPT:
Good morning! Mike Brady with Generosity Wealth Management and I am here in Boulder Colorado, giving you my first quarter review and my second quarter preview.
Absolutely wonderful first quarter; I’m going to throw some of the numbers up on the screen, if you can look at them, looking great. I don’t know the exact numbers because I’m actually doing this on Thursday and the quarter ends tomorrow but I wanted to get this to you as quickly as possible the first week of April. But we have incredibly low volatility right now, so unless something really big happens on Friday, I thought I was safe.
This first quarter, very forgiving of any mistakes, almost every sector was up. Very strong quarter, we have six months that are up, the last six months; October, November, December, January, February, March. If you look at my video, and I’m going to provide a link to my video the first or second week of January, where I look at 2012, I stand behind what I said at that time. Which I believed that there was going to be some volatility for 2012, and I think we still have to see that. We’ve actually had unbelievably low volatility but I also said that I was optimistic about 2012. I believe then, and I believe now, so I’m sticking to my conviction, that the cash, the strength of the corporations of the companies that are out there, and that the PE ratios are low, that the companies are actually undervalued for what…, when they decide to deploy some of that capital back into their businesses, and into research and development and to really move things forward, this will be a very good thing. And increase the valuations from where they currently are.
And so I continue to be optimistic. I mean, I’m asked every once and a while why the volatility is so low right now? I mean, let’s, you know, together just remember when there was 100 point DOW swings all the time, and frankly, all the way up to 4 and 500 point swings. We haven’t seen that this past quarter and in quite some time. It’s my belief that the investors are out there, both professional and you know, kind of household investors, are not really having one conviction, one way or the other that this is a market that they absolutely have to participate in- and so strong on the “buy” side; or those that they absolutely don’t want to be a part of. I think it is somewhat of a low volume, listless market at this particular point.
Now that being said, as we look at the VIX, which is the volatility index, currently, kind of the spot price is very, very low- which is what we’ve seen. But when we start to go out, you know, two, three, four months, there actually is more implied volatility. So the market believes that the volatility will increase in the coming months and that makes sense. We should not be lulled into thinking that just because this last quarter was very low volatility that the next quarter or even the quarter after that will be low volatility.
This is also an election year. Let’s not forget about that. November, the first week of November is, one way or the other, when I say one way or the other, whether you’re a Democrat or Republican, whichever one that you want to win, at least there’s going to be a certainty about who’s going to win, and so that uncertainty starts to go away. And that’s a good thing, I think, for the markets the last quarter of this year, November and December.
But that being said, let’s get back to the second quarter. I think that things will continue to go forward. If I’m wrong, let’s say that I’m absolutely wrong, and the second quarter is negative, that’s one of the reasons we go back to our foundation, some of our basic investing 101, which is to remain diversified. I do believe that each client needs to look for themselves, and I work with my clients to determine, what’s the appropriate allocation of both stock and bonds? Because what I have found is that the thing that I love the most, many times I’m wrong on, the thing that I hate the most, sometimes I’m wrong as well. I remember a quote from Peter Lynch, who made Fidelity Magellan in the 80s extremely famous. He said, “you know I love all my stocks that I buy. That’s why I hold them, is that I like my stocks, I think they’re going to do well. But invariably, on 20% of them, I’m wrong. That’s just the way it is and I just have to learn to live with it.” And so, that’s one of the reasons why we diversify, is while I am optimistic, while you might ask yourself what’s my conviction? Do I believe the United States is the place that I need to invest in, both our companies and kind of stop listening to all the “perma-bears”; you know, people who for the last three years, as the market has basically just done extremely well, are always the naysayers. I mean there’s always something to be negative, if you’re looking for negative. But that’s why you remain diversified. I have my clients that way, I’d be happy to help you out if you’re not one of my clients.
So, anyway, that’s my video this week. I continue to be very pleased with the first quarter. I continue to be optimistic as the year unfolds. And there will be some volatility going forward, probably increased volatility, but you know what, hopefully we’re well prepared for that and I’ve … you know, we’re ready. When it happens we’ve already planned for it. And we’re thinking about it.
So that’s my video, and on a personal note, I usually go to Africa sometime during the year, usually in April. This year I am not going. I’m very pleased that my business is frankly hit a point where it’s really growing. I’m working with my clients, just absolutely having a great time doing that. So many of you have referred people to me and I’m working with them as well. I do some great stuff with two wonderful organizations in Uganda and Rwanda; BeadforLife in Uganda, and Peacemaker Institute doing some assistance with Genocide reconciliation in Rwanda that’s really kind of a humanitarian thing. I’m absolutely moved by the impact that we’re having there but also with BeadforLife in Uganda. It’s an income generation, kind of a women’s empowerment project there in East Africa. And I usually go there as I’m on the board of both those organizations. Perhaps I’ll be able to go later this year but for right now I am here in Boulder, working with my clients and of course, watching things very closely.
Give me a call, 303-747-6455, Mike Brady, Generosity Wealth Management. And I have a couple of disclosures here coming so of course stay tuned for those but you have a wonderful week and let’s all have a great quarter. Thanks! Bye, bye.
In case you’re curious about my video at the beginning of the year, here it is.
