Blog Index
The journal that this archive was targeting has been deleted. Please update your configuration.
Navigation
Thursday
Oct162014

Stock Market Volatility is Your Friend

The progress pattern of the stock market is always “two steps forward and one step back”.  We have been telling clients for months that eventually there will be another stock market “correction”.  The S&P 500 posted an all-time high about four weeks ago and is down about 7.5% since then. 

It has been over three years since the S&P 500 has experienced a price pullback of 10%.  During those three years the market has gone up over 90%.  Up 90% and down 10% should not be a cause for panic. 

If this is the beginning of a 15% - 20% market correction, it is important to understand that there is a plan in place for your assets that will ultimately have you profiting from the volatility.

Why Diversification is Important? - When the stock market corrects, we see something that is called a “flight to quality”.  This is when some stock investors get spooked by the correction and sell their stock investments.  When they do so, they need to put their cash to work somewhere so they buy lower-risk investments like bonds which, in turn, push the price of bonds up.

We recommend that even our most aggressive clients hold at least a small percentage of bonds in their portfolio.  Not only do the bonds dampen the volatility of the total portfolio but they also provide “dry powder” for us to use to buy more stocks when they are “on sale” at values of 15% - 20% lower than their most recent high.

Sell High, Buy Low - In prior newsletters, we’ve written about the importance of rebalancing an investment portfolio.  Rebalancing is simply the act of bringing a portfolio back to its original target allocation by selling some of the investments that have recently outperformed (sell high) and reinvesting the cash into the investments that have recently underperformed (buy low).

We Are Working the Plan - Since the summer of 2011 (the last time we had a stock market correction),  nearly all of our rebalance transactions for clients have required taking profits from the stock side of the portfolio (selling stocks) and reinvesting the proceeds on the bond side of the portfolio .  If stocks continue to decline, we will be doing the opposite: taking profits from bonds after the flight to quality pushes their prices up and reinvesting in stocks while they are on sale.

According to an independent study by Vanguard, this systematic process can add an additional 0.35% of performance per year to a portfolio.

In the meantime, we understand that it is no fun to watch account balances go down.  Remember, corrections are inevitable but so are recoveries.  If we understand this and have a plan for what to do along the way, we can actually benefit from the market volatility instead of fear it.

For now, try to avoid the doomsday news reports about the markets.   We are paying close attention to your investments on a day-to-day basis, so let our stomach linings take the brunt of the damage instead of yours.  We have plenty of tums in the office to get through it for you!

Tuesday
Sep302014

Financial Planning for Your 20s

When you’re in your twenties, change is a way of life. You’re choosing a career, paying your own bills, getting your own place to live and perhaps making decisions about marriage and family.

The more things change, the more important a stable financial foundation becomes. We’ve listed ten principles that should be carved in stone for every twentysomething. No matter where you are on the pathway to independence, these time-tested guidelines will boost your odds of financial success.


Wednesday
Apr092014

Not Rocket Science

When the media raises the subject of beating the market through astute stock picking, the name Warren Buffett is usually cited. But what does this legendary investor actually say about the smart way to invest? 

Buffett is considered to have such a track record of picking stock winners and avoiding losers that his annual letter to shareholders in his Berkshire Hathaway conglomerate is treated as a major event by the financial media.1

What does he think about the Federal Reserve taper? What could be the implications for emerging markets of a Russian military advance into Ukraine? What does an economic slowdown in China mean for developed markets?

Buffett has a neat way of parrying these questions from journalists and analysts. Instead of offering instant opinions about the crisis of the day, he recounts in his most recent annual letter a folksy story about a farm he has owned for nearly 30 years.2

Has he laid awake at night worrying about fluctuations in the farm’s market price? No, says Buffett, he has focused on its long-term value. And he counsels investors to take the same sanguine, relaxed approach to liquid investments such as stocks as they do to the value of their family home.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” Buffett wrote. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

While many individuals seek to ape Buffett in analyzing individual companies in minute detail in the hope of finding a bargain, he advocates that the right approach for most people is to let the market do all the work and worrying for them.

“The goal of the non-professional should not be to pick winners,” Buffett wrote. “The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

As to all the predictions out there about interest rates, emerging markets, or geopolitics, there will always be a range of opinions, he says. But we are under no obligation to listen to the media commentators, however distracting they may be.

“Owners of stocks … too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,” Buffett wrote. “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments.”

The Buffett prescription isn’t rocket science, as one might expect from an unassuming, plainspoken octogenarian from Nebraska. He rightly points out that an advanced intellect and success in long-term investment don’t necessarily go together.

“You don’t need to be a rocket scientist,” he has said. “Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”3

 

1. “Buffet Warns of Liquidity Curse,” Bloomberg, Feb 25, 2014.

2. Berkshire Hathaway Inc. shareholder letter, 2013, www.berkshirehathaway.com/letters/2013ltr.pdf.

3. “The wit and wisdom of Warren Buffett,” Fortune, November 19, 2012, management.fortune.cnn.com/2012/11/19/warren-buffett-wit-wisdom/.

Tuesday
Apr082014

Seven Ways to Fool Yourself

The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag.  Click below to read more…

Thursday
Apr032014

Putting a Value on Good Advice

A new Vanguard research paper, Putting a value on your value: Quantifying Vanguard Advisor’s Alpha, by Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering, expands on the 2001 concept of Vanguard Advisor’s Alpha™, which outlines how advisors can add value, or alpha, through relationship-based services such as financial planning, discipline, and guidance, rather than by trying to outperform the market.

The authors attempt to quantify the benefits that advisors can add relative to others who are not using such strategies. The paper includes seven “quantification modules” summarizing key wealth-management best practices and providing a reasonable framework for describing and further differentiating advisors’ value proposition.