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.
Now is a great time to ensure your beneficiaries are consistent with your wishes.
But you have a will? It doesn’t matter if it’s an IRA, 401k, or other typ
e of account that transfers by “contract” vs. through probate.
Have an ex-spouse you used to have as your beneficiary but are now remarried? You have to proactively change it to your new spouse if that’s what you want. It won’t change by itself!
Talk with me if you need a good estate planning attorney recommendation.
In my video today, I discuss what I’m hoping people don’t take away from 2013.
Diversification? What that?
For a full discussion of this, listen to my video.
Transcript:
Hi there, Michael Brady with Generosity Wealth Management, a comprehensive full-service wealth management firm headquartered right here in Boulder, Colorado.
Today, I want to talk to about the lessons of 2013. I know it is only mid-December but we’ve got 11 1/2 months and I think it’s close enough. More than anything, I want to talk about the lessons I’m hoping investors don’t take away from 2013.
Before I get started, let me just say you’ve heard me for a long, long, time talk about diversified portfolios. A diversified portfolio does not guarantee that in a generally trending down market, that you will not lose money. It’s going to be stocks and bonds and cash. However, a diversified portfolio is still absolutely essential.
This past year 2013, the best thing you could have done was have 100% of your money in the US stocks, either stock index or a preponderance of individual US stocks in general. Why have any of those international stocks? Or avoid bonds. In general, bonds, ETFs, or bond mutual funds in general are down single digits or maybe even double digits if you’ve got some long term treasuries. If you’ve got a real estate investment trust, maybe you’ll break even for the year. If am an unsophisticated investor, I might say, “Gosh, this whole diversification things, ah that’s crazy. We should just look at the US stock market the past year and so for 2014, I should just have 100% of my money in the US stock market.”
My answer is that is the wrong lesson. I happen to be bullish. You’ve heard me considering the last two, three, four months, that because of the quantitative easing and the amount of money that’s out there, et cetera, and some other factors, I happen to be more optimistic for 2014 than I otherwise would be. I think at least for the next couple of years, things might be okay but of course that could change. As data changes, maybe my opinion changes. However, the reason why, I’m going to throw a chart up on the screen there and I’m going to highlight the purple ones. You probably can’t see it because it’s kind of small but that happens to be one unmanaged stock market index and you’ll see that in some years, 2003, 2004, 2005, 2006, near the top there, it is one of the best performers. All the way up until 2007 and then it’s the worst performer losing well over half of its value, 53%.
Then in 2009 it’s the best and then it’s okay for a couple years and then it’s absolutely the worst in 2011. Then it’s the best in 2012 and in this past year it’s down near the bottom again. That is all over the place but right there in the middle you’re going to see that the diversified portfolio, the asset allocation thing there is sort in the middle. It is never the highest, it is never really the lowest and that is one of the things that diversification has to do. If going forward into 2014 we know which asset class was going to be the best one to be in, of course we would move 100% of our assets. Unfortunately, we never know that going forward because we can only look in the rearview mirror and say this is the one that I wished that I had. Beating yourself up over it doesn’t help and then taking that and assuming and extrapolating that into the next year just rarely works.
I am going to throw another chart up onto the screen there and what you’re going to see is that over the last 62 years. This is all the way from 1950, that green bar there on the left hand side is the range in one year that some stocks in one of those years, it took two years when the stock market index went 51%. But also one year, it lost 37%. If it was bonds, the very best was that 53, the very worst was 8, but a combination of the two is that last one of 32 to 15. As we go out five years, what you’ll see is you’re starting to normalize your returns and start to get low or high but also higher lows, which is usually what people are looking for. Of course, if we can have our cake and have all of the high highs and of course the highest of lows, that would be a perfect world but when we go out 10 years and then 20 years, what you’ll see is a diversified portfolio starts to get rid of that uncomfortableness of the huge year by year fluctuation because when you have that huge decline on a one year, most people take that the next year will also be a huge decline.
When we look back to the beginning of 2009, March of 2009, that was kind of a low for the market after that huge horrible fourth quarter of 2008 and the first couple months of 2009, most people were not thinking wow the US stock market is what I want to buy into. That is not what most people were thinking but that is actually in hindsight the best time to buy. What I’m hoping that people will not take away from 2013 is that diversification has no value and that is a big joke. That is not the case. A portfolio of stocks and bonds and cash and then of course other types of asset classes that surround it, historically have had the effect of reducing some of the volatility in the high highs and the low lows over time and it creates in my opinion a better portfolio.
One of the concerns that I have is that so many unsophisticated investors will only look at 2013 and dump all of this money in 2014 into just that one asset class which is the US stock market or the unmanaged US stock market index either through an ETF or a mutual fund or an indexed fund or something like that for the wrong reasons. Not because they’d really thought it out but they’re going to have unrealistic expectations and that is unfortunately probably going to come back and bite them. Maybe not in 2014, maybe not in 2015, but if they come with these unrealistic expectations without a diversified portfolio—if I’m wrong, they’ll have nothing to stand on from a diversification point of view to offset what that wrong analysis was. That’s it.
At age 62, you receive 75% of what you’d receive at your full retirement age (assuming 66). If you delay until 70 years old, you accrue 8% more per year (32% over 4 years).
In general, I usually recommend waiting until 70 to start your social security, but this is also assuming a long life.
When you’re looking at social security planning for couples, I have a program on my computer that can track all the permutations (file and suspend, delay, spousal benefits), etc.
In my video today, I discuss “what’s your philosophy?”. I don’t mean stock investment philosophy, I’m talking about what you value in your investments.
Liquidity, transparency, marketability. These are core values of mine.
But, others can have a different approach with different importance placed on certain criteria, and that’s okay! What works for you doesn’t have to work for them, and vice versa.
For a full discussion of this, listen to my 4 minute video.
