“I want you to be everything that’s you, deep at the center of your being” — Confucius
This is my year end video, and it is one of the most important I’ve done in some time. It is a reminder of some of the basics and foundations of investing!
I answer 5 questions that investors are probably asking themselves right about now
- What happened in 2015?
- Is this normal?
- Do I have the right investments?
- Will next year (2016) be different?
- What should I do?
Especially if you’re my client, you need to watch the video to get my answers.
Click on the video
Transcript:
Hi there clients and friends. Mike Brady here with Generosity Wealth Management, a comprehensive full service financial firm here in Boulder Colorado. 2015 is now behind us. Let’s look forward to a very happy 2016.
So, before I get into answering some of the technical questions and a review of 2015 I just want to say that personally this has been one of my best years ever in my life. Just about to turn 47 and I feel ten years younger. I lost over 40 pounds, became very involved in a lot of martial arts this year. And so from a health and fitness point of view I feel really good about that. Many of you know I’m a voracious reader and so I read 94 books this year and professionally I was quoted as an expert in almost 40 different articles from Washington Post to Forbes, Fortune, Wall Street Journal, ABC News, Portfolio Advisor Magazine. I mean I was really honored that so many different journalists and publications thought that I could help others out in that particular way.
Let’s talk about 2015–blah. That is not a technical term, that’s my kind of analysis of 2015. What I want to do is I want to answer five different questions here today as efficiently as I can.
- What happened in 2015?
- Is this normal?
- Do I have the right investments?
- Will next year be different, 2016 be different?
- And what should I do?
And I think that those are all very common questions that people ask themselves about this time of the year and so if I want to address each one of them.
So what happened in 2015? I’m going to put up on the chart there the Dow Jones Industrial Average an unmanaged stock index. What you’re going to see is that the first five or six months were pretty much break even, pretty much sideways and then the third quarter hit. The third quarter, July, August and September, was the worst quarter in about four years since 2011 when we had that S&P downgrade of U.S. government, just a horrible quarter. Then what is interesting is October started to really dig us out of the hole, I mean really was one of the best months in many years, but we have November and December and they were pretty much sideways. So what does that really mean for an entire year? It really means that it was a year that was not horrible, negative ten percent greater. I wasn’t a good year, it was just sort of like in between. And depending on when an investor might of invested from a time horizon into an index, they could be negative for the year, particularly if they came in halfway through the year. I mean that’s a very frustrating place to be if a time horizon is very short, which is, of course, one of the big things that we always have to keep in mind is that let’s have that long-term time horizon.
Markets do three things: they go up, down and sideways. I’m putting up on the screen there the S&P 500, another unmanaged stock market index since 1997. So what is that?–that’s 18 years. So what you’re going to see is an up, down and I just circled there in red the last year. When you look at a longer time horizon it really was just sort of a blip, an irritating blip when it happens but a blip nonetheless
I mean I think of investing sometimes as a mosaic in that when it’s so close in front of your face it’s hard to have any kind of a prospective, so therefore it is absolutely essential to look back on it and have some prospective to see how all those dots come together. That’s why I think that the people who do the best are those that really keep that long-term perspective in mind. Is this normal is my second question for you? Up on the screen is a chart, a graph going back to 1980. So we’re looking at a good 34 years or 35 years, you’re going to see 27 out of those 35 were positive. The red numbers on the bottom are the Intra-year declines. This is one of the graphs that I use repeatedly in my videos because it is normal for there to be declines throughout the year. That does not mean that the year is going to turn out negative. This year, at one point, we had a pretty sharp decline of about 12 percent. That didn’t mean that the year has ended negative 12 percent. But every year is not going to be a positive and that’s part of investing is understanding that.
Up on the screen is another chart going all the way back to 1926. That includes, of course, the great depression, that includes the tough 1970’s, 1987, the tech bubble in the early 2000’s, 2008 in recent history. And what we have seen is that 73 percent of the time the U.S. stocks have been positive. That’s almost three out of four years are positive. That means one out of four is not. When we look at that zero to ten percent, when we add in that bar graph that’s slightly negative, that means that 87 percent of the year, since 1926, have been positive or just slightly negative. That’s about nine out of ten years. That’s a pretty good average I think, pretty good odds. What is difficult is when you’re so afraid of investing as an investor that you’re running away from the really bad, which do happen. When we look at those numbers there 13 percent of the years have been a ten percent decline or greater. That happens maybe one out of ten years on average. But you know what, that also means that you give up the nine out of the ten that are only slightly negative or very positive. So I think that it’s important to remember that they do happen but we can’t live our investing life by only avoiding negative things because then you’ll never get out of bed in the morning if you’re always worried about what’s bad going to happen that day, you don’t look at all the wonderful things that can happen in your life.
The next chart is going back to 1915. They’re in groupings there. The first one is one year, five years, ten years and then 20 years. The first kind of green bar is 100 percent stock market index, unmanaged stock market index. The next one is 100 percent bond index unmanaged. And then the third bar in that kind of an ugly brown off-color something is 50 percent of those two things together. The most important thing here is that the time horizon is very important. On a one year track going back to 1950 there have absolutely been years where the 100 percent stock market has been negative, 100 percent bonds and even a mismatch of the two have been negative. But when we go out longer, five years, there actually historically has never been a five year time horizon where a 50 percent stock and bond has not at least broken even or made a little bit of money. Same thing when it goes out to ten years and 20 years. So time is in our favor and so we always have to keep that time horizon, that big picture in mind.
I’m going to throw another graph up there and this is the stock market since 1900, so that’s a good 114 years. And you’re saying well my time horizon is not 114 years. Yeah. I get it. Mine’s not either. However, why don’t I circle that little bit. You can see that we actually have broken out of a sideways market. And so I personally believe that that’s going to continue up. If you’re invested you have to believe that as well otherwise why do you have investments? If you don’t believe that five or ten years from now investments are going to be greater than they are today then why do you have them? You should have your money in the mattress or in a CD.
So, I’ve answered the first question, which is what happen in 2015? Is this normal? The answer is yes. Do I have the right investments? This is absolutely a normal question to ask yourself. And I think that if you are well diversified I think that’s the right approach, well diversified and have the right time horizon.
For clients, of course, I’ am continually looking at their investments throughout the year. And so if there’s something that I need to change or I believe should be changed as I look to the future then I let them know and I’ll, of course, do that as I’m doing my year end statements as well. One thing that we really want to watch out for is not moving and trying to chase returns one after another because I think that’s an amateur mistake and that’s something that we should watch out for.
Will next year be different? Listen, anyone who’s going to tell you that they know what the future holds is lying to you. I’m just upfront that nobody knows and I don’t know as well, so therefore we deal with probabilities. I believe that 2016 will be positive but I don’t know that. So therefore if I’m wrong then I only want to be a little bit wrong and I want to fall back on that diversification and I want to fall back on how does this fit with what my goals are, my individual goals and what my time horizon is.
Historically election years are good. I just had to look at my notes here. And I believe because of the profitability and the cash supply, the money supply that’s out there that I think that we’re going to continue with, even with rising interest-rate in 2016 we’re going to end out of the year 2016 in a positive, but I could be wrong. I’m human. Nobody knows the future. I just admit that I don’t know the future. And so therefore we fall back on let’s have the best investments that we can and be well diversified in them.
What should I do? That fifth question is very common to ask. I will be reaching out to a few clients to some of you this year because there are a few things that I want to change in 2016, a couple of investments in particular, a couple tweaks here and there and it’s normal to do that. Otherwise chill out. I mean pay attention to the rest of this video. I mean if you’ve gotten this far in the video hopefully you’ve gotten the message that it’s normal. It wasn’t this horrible year, it was a slightly disappointing because we didn’t make money, potentially, if you’re in an unmanaged stock market index or an unmanaged bond index. But you know, one thing that history has shown us is that these things happen periodically and they are definitely not something to overreact.
I mean unfortunately many people ignore and then overreact. And so I hope that you’re not ignoring and I certainly hope that you’re not overreacting. If you knew how much your house fluctuated in value on a daily and on a monthly basis would that freak you out? Maybe. Good thing you don’t know. I mean if you’ve got a house that you’re very pleased with over a 10/20/30 your time horizon what does it matter? And so we’ve got to keep that in mind along the way.
The average investor, I’m going to throw a chart us there, the average investor is that orange on the right-hand side. And you can see all these other categories, the blue one is a mix between an unmanaged S&P 500 and unmanaged bonds. And so the average investor usually underperforms because when we look at the inflows and outflows of the stock market really you’re supposed to buy low and sell high right? Well, when we look at the inflows into mutual funds real people do the wrong thing. The late 1990’s, I know this for a fact, people were jumping into Internet stocks because you couldn’t lose in that and so they jumped into the bubble at the high, not at the bottom. Same thing. As we look at 2008 and 2009, 2009 was absolutely the right time to buy but people were so freaked out from the year before that they sold everything at the bottom. And so what we want to do is not be the person who has a negative year or even a sideways year and says okay, well now I want to move it all over into cash. I just don’t think that’s the right way to do things. And so therefore, as we have the right time horizon, as we have the right diversification, patience and that vision is what I think is going to best serve investors long-term.
Anyway, Mike Brady, Generosity Wealth Management (303)-747-6455. Give me a call if you have any questions, otherwise it is great to talk with you versus this medium. If you’re my client, of course, I’ll be talking with you within the month. So anyway, I hope you have a great day.