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.
In one of the weirder things I’ve ever seen in my entire life, here is an exercise video with a Poodle-Shaped Woman Leading an Exercise Class of Standard Poodles.
You know I love Standard Poodles, but this is making them all look bad.
Like investment theories, there are different philosophies on the best way to hold a hamburger for maximum efficiency.
Hey, I’m an efficiency fanatic and need to know these things.
So, researchers spent 4 months (experts in fluid mechanics, engineering, and dentistry) to figure out the best way eat a large hamburger. It included a 3D scan of the hamburger to study how the particles interacted together.
Now that I’ve teased you, click on the link to watch the 1:26 video with the answer.
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.
The first quarter is now behind us, but all the excitement happened in the first week of April!
After reaching new highs, the unmanaged stock market indexes pulled back a little bit, so the question we have to ask ourselves is “what does this mean for the rest of the year?”.
Good question, and one I answer in the below video:
Hi, this is Mike Brady with Generosity Wealth Management, a comprehensive full-service wealth management firm headquartered right here in Boulder, Colorado, and today I want to talk about the first quarter review and the rest of the year preview, but I also want to talk a little bit about time horizons and our perspectives, recency bias, a confirmation buys, those things of things.
The first quarter review is both stocks and bonds, unmanaged stock market and bond indexes were positive for the quarter. Bonds were really bad in 2013 and if you could go back to 2013, you’d have no exposure to them. Well, you were vindicated in the first quarter. They were really what brought up a balanced portfolio for the first quarter of this year. The stock market started off well in January; we only kind of stumbled; dropped around 6% at the S&P. The unmanaged stock market index S&P 500 dropped about 6% through the middle of January to the middle of February and they kind of came back and of the dictating this video, I’m not – let’s see, this is April 8, Tuesday – that we’ve given up some of that gain that we had in the first quarter, so we’re about breakeven for the year in the unmanaged stock market indexes. I think that it’s real important to know what your time horizon is and the reason why I bring that up is if your time horizon is weeks or months or if you need the money for some kind of a purchase in a year or two, these kind of fluctuations could be really kind of scary; however, we’ve got to take a big picture on this and really look at it from the long point of view, because if you’ve ever held up like a piece of paper that had some ink on it really close to your eyes, you can see the actual droplets of the ink. It’s only when you go backwards, kind of some distance from it that you can really see how everything kind of fits together. I’m going to put up on the screen there the S&P 500 for about the last, let’s see, what is that, 14, 15, 16, 17 – 17, 18 years or so, and you can see that it goes up and it goes down, et cetera, and so the question we might have is this big upward swing there. I’ve frankly been hearing from people for two, three, four years about how, oh, we’re at the top again, and then when it hit those new highs a year or two ago, oh my, gosh it can’t go any further.
Well, you know they always joke that economists have predicted 15 of the last three recessions, okay, and so it’s always easy to be negative. It’s a little bit more difficult to be positive. I’m going to put up on the screen there again; this is annual returns in intra-year declines. You can kind of see that far right-hand side there, the year-to-date number and then that red number underneath is that we had a 6% decline throughout the year. That was the maximum decline that we had for all of last year, so it’s actually been relatively low historically from a top to a bottom within a year, so that’s something to keep into consideration.
I am still optimistic for the rest of the year. One thing that we have to watch out for as it relates to data is we have a tendency to extrapolate short-term events and say, wow, that’s what’s going to happen for a long-term and it just doesn’t work that way. Just because things have gone up doesn’t mean they’re going to continue to go up. Just because things have gone down doesn’t mean they’ll continue to go down and so we place more emphasis on recent information than maybe data that is six months, 12 months, or even three years old. When we look up at this one screen that I just threw up there on your video is interest rates and equities. From the left to the right is the yield that you have on your 10-Year Treasury, which as of this chart creation was 2.72; as of today, it’s actually about 2.67. Not important to know that except to the degree that the correlation between a rising, where the yield is going from 2.7 to 3 to 4 that the market is actually continuing to go up, and so they have moved in lock stock in the past.
I’m going to put up another screen there. You’re going to see that circle there. Lots of corporate cash that has continued to be a very strong thing as I see. Quantitative easing has thrown so much money into the system that that is continuing to prime the pump. If you look over on the right hand side, there, that second circle that I just did, cash return to shareholders, lots of profitability and cash being returned. Now, today’s video I’m going to make relatively short, because I’m going to try to do more videos, but make them shorter. I’ve been kind of bad this past two months or so and I just unbelievably busy. Even I want to make this short and pithy.
Diversification, while in a generally trending down market does not guarantee that you won’t lose money; it is a very wise thing to do. On the pie chart on the top left is your stocks, your bonds, your internationals; and then on the right hand side you’re going to see an even more diversified portfolio adding in some real estate investment trusts and other things like that. One of the things that I’ll be doing for the appropriate clients going forward is diversifying out. I do believe in diversification, because if this past quarter is any indication, sometimes it’s the bonds that hold up your portfolio, sometimes it’s the stocks that are the driver behind your portfolio. I think that the standard deviation, the variance, the ups and downs, the volatility is very important, because we want to set ourselves up for success and unfortunately your average investor buys at the top and sells at the bottom and really hurts themselves.
We want to set ourselves up for success by creating a portfolio that hopefully will have reduced volatility so that when the market does go down, which inevitably it does at various points, whether that’s a small decline or a larger decline, whether or not that’s a quick recovery or a longer recovery, we want to be well prepared for it with a time horizon that is long, but also not be the dump money and sell at the bottom. That bar graph at the bottom, where you’re going to see is on the far right-hand corner, the average investor, when we take into consideration inflows and outflows of the stock market, mutual funds, things of that nature, unfortunately does the wrong thing at the wrong time and we simply don’t want to do that. I continue to be optimistic for 2014; I have not changed from that. I encourage you to go back to my January video and I lay out in 17 minutes or so an argument for that – that has not changed. I’m not freaked out. I am completely, if you can see my hand there, I’m completely rock steady, so that’s where I am.
I am going to continue to add a couple of extra asset classes to sell clients, and many of you, I’ll be talking with you about that. Some of the upcoming videos I’m going to do is I’m going to read Michael Lewis’s Flash Boys on the high-frequency trading. Everybody get, but I’m going to dissect that and give my opinion. I also want to really talk about social security; I want to do a whole series frankly on social security and Medicare, retirement and all of those things, because I think that’s very relevant. One of the values that I can add is what’s the right stuff to own, what’s your withdrawal strategy, et cetera, and I just find it all fascinating and I think it would be a great value to you.
If I can help you out in any way, please give me a call. Mike Brady, 303-747-6455. Stay tuned for another newsletter after this one. Have a great week. Bye-bye.
One third (1/3) of workers and retirees have less than $1,000 in savings and investments in their retirement nest egg.
Only 44% have done a calculation to find out how much they should be saving.
With longer life expectancies, your retirement years can be the best years of your life, but outliving your money is a real risk!
One of the biggest and best values I bring to clients is the ability to put the pieces of retirement planning together, and chart the progress along the way.
Please contact me if you feel I can help you with your retirement planning.
