What to do During a Stock Market Crash

So the stock market has officially had a “correction” over the last 2 weeks which is a 10% drop from the previous high.  And many people are panicked!  But panicking after a big drop in the market can be very bad for your long term retirement account.  Especially if that panic involved pulling your money (10% less than you had 2 weeks ago) out of the stock market.

This might sound weird but I actually got excited when the stock market took it’s big tumbles over the last 2 weeks.  I have been waiting for a good opportunity to “buy low” in the stock market.   Yes, now is the best time to put extra money into your retirement investment account.   Buying shares in a time like this is like when your favorite store has a 10% off your entire purchase sale!  Basically, you get the same items for a lower cost.

There are a few reason why I don’t panic when the stock market goes down.

First, I understand that the stock market has always come back from corrections and crashes to reach new highs.   Along with that, I know that the stock market as tracked by the S&P 500 has made over 10% per year on average over the last 30 years.   I often get asked by people, what if it just keeps going down and I lose all my money?   Investing in a diversified mix of over 12,000 stocks makes it very unlikely for you to lose all of your money.  What are the odds that 12,000 companies across the world in different sectors providing different products all go bankrupt at the same time?

Second, I know I am in this for the long haul.  Every investor is at a different place and will use their money for different things.  If you are needing the money you have invested in the next few years, you should definitely not have a vast majority of your money in stocks.  But either way, you can be invested for the long haul.  Even throughout retirement, yes have a big chunk of your money in bonds, but why wouldn’t you stay invested and give your money a chance to grow and keep up with inflation.  Smart people look at investing as a lifelong thing.

Third, I don’t believe that me or anyone else can accurately predict the future.  This is a big one.  I get asked all the time innocent questions about investing and the stock market from clients and others that are all based around predicting the future.  Questions such as, is this going to end up being a crash?  Do you think stocks are overpriced?  How much do you think a diversified mix of stocks will make this year?  When I answer this question by saying I cannot predict the future, people are usually not satisfied.   The great thing about it is that you do not need a prediction about the future to be a successful investor and make money in the stock market.

Lastly, I believe in the phrase, buy low and sell high.  It is usually the hard thing to do at the time.  When the stock market is crashing down and you see the headlines say, this is the biggest drop in the Dow in its history, it isn’t necessarily an easy thing to buy stocks on that day.  On the opposite end, when the market is up for 2 straight years and the economy looks great and the headlines say, this is just the beginning for stocks, it isn’t easy to rebalance your portfolio and thus sell stocks and buy bonds.

Ultimately, we know there are going to be stock market ups and downs in the short term, but if you have a low cost diversified mix of stocks you will be doing alright in the long term.

By Jimmy Hancock

References

1. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.

Is It Now Safe to Invest in the Stock Market?

All time highs and continued growth in the stock market seem to scare investors.  You can hear fears of a pull back on any media outlet you prefer.  But  Perhaps one of the biggest challenges that investors face is determining if “right now” is a safe time to invest (meaning not just the present, but any time). What makes it difficult for investors is a twofold issue: first, is a lack of historical knowledge and perspective, and second, their own emotions. Actually, if one looks back on an historical basis, it would have appeared that there was no safe period in which to invest. Investors are really funny in this regard (actually most advisors are really no better). In 2009 investors were in shell shock coming out of the 2008 financial debacle. By 2015 it was really too good and couldn’t last. Then came the Trump Election, which people thought would most definitely crash the market.    What investors are looking for is something that does not exist—ever—a “Goldilocks” market!

I’m going to take some historical facts and figures to provide some historical context that may enable my clients to feel more comfortable when faced with the ongoing question of “is it safe.”
The first issue that investors must confront is that there is no such thing as a “safe” investment and this applies whether funds are invested in equities, bonds, government fixed income, gold, real estate, your mattress or in a coffee can in the back yard. Your money is always subject to one form of risk or another. For a more complete discussion on this subject read Main Street Money by Mark Matson. If you don’t have a copy let me know and I will get you one.
In this blog, I’ll confine myself to discussing equities and fixed income contained within a diversified portfolio that is periodically rebalanced, with dividends and capital gains reinvested, because that is what we do with our client’s money. Let’s take a decade by decade look at all the challenges investors have faced.

1920’s
• 1917-23 Russian Civil War
• 1922 Mussolini takes control of Italy (eliminates private ownership, total government control!! Hmm!)
• 1923 Hyperinflation in Germany
• 1926+27 Chinese Civil War
• 1929 Wall Street Crash
• 1929-39 Great Depression
A horrible period to be invested in the market—manic market followed by the 1929 crash. Yet a fully diversified portfolio had $100,000 growing to $135,000 at the end of the decade.

1930’s
• 1932-33 Holodomor Starvation
• 1933 The Nazi Party come into power
• 1933-45 The Jewish Holocaust
• 1935 US Presidential Candidate Assassinated (Huey Long)
• 1935-1936 Italian/Abyssinian War
• 1936-38 Stalin Purges (including Gulag Death Camps)
• 1936-39 Spanish Civil War
• 1937 The Hindenburg Airship Explodes
• 1939-45 World War II
Talk about a horrific period to begin investing? Probably the worst ten year period, economically we have ever experienced. Yet, $100,000 invested at the beginning of the decade grew to $152,000.

1940’s
• 1933-45 The Jewish Holocaust continued
• 1939-45 World War II continued
• 1945 President Roosevelt dies before the war ends
• 1945 Eastern Europe is dominated by Communist USSR
• 1949-1993 The Cold War
What could be a worse time to begin investing as Word War II was starting, followed by the beginning of the Cold War. Let me interject an investment factoid here. The renown international investor, Sir John Templeton made his initial reputation by borrowing $10,000 and buying 100 shares of every stock on the New Your Stock Exchange selling for less than $1 at the start of the war.
If you had controlled your anxiety, like Sir John, and invested $100,000 at the start of the decade, you would have been amply rewarded by seeing that investment grow to $336,000!

1950’s
• 1949-93 The Cold War continues
• 1950-53 The Korean War
• 1951 Mao Zedong takes power in China
• 1956 Suez Canal Crisis
• 1956 Russian quashing of the Hungarian Revolution
• 1959 The Cuban Revolution
• 1959-75 The Vietnam War
This was supposedly the boring decade under President Eisenhower. However, international events didn’t take a holiday and they continued to swirl about us creating many excuses for avoiding the assumption of any investment risk.
Nevertheless, investors who ignored events and invested $100,000 at the start of the decade had $393,000 in their portfolios at the end of the decade.

1960’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1961 The Berlin Wall built
• 1962 The Cuban Missile Crisis
• 1963 JFK Assassinated
• 1964 China explodes its first nuclear bomb
• 1967 Six Day Israeli/Egypt War
• 1968 MLK and RFK assassinated—rioting in major cities
• 1969 Libyan Revolution—Khaddafi comes to power
This was the decade where we got to watch both national and international occurrences in almost “real time” thanks to the expansion of television and global communications. An event filled decade both home and abroad. Plenty of excused could be found as to why it was not safe to invest. Yet again, $100,000 invested at the start of the decade produced a portfolio worth $259,000 by the end of the decade.

1970’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1970 The beginning of Terrorism in the world
• 1972 Kidnap and murder of Israeli Athletes at Olympics Games
• 1972 President Nixon resigns
• 1975-79 Khmer Rued in Cambodia (Genocide)
• 1979 Saddam Hussein comes to power
• 1979-1981 Iranian kidnapping of U.S. Embassy and diplomats
This decade begins with Vietnam, followed by the Nixon resignation, then the Iranian Embassy kidnapping, and ends with President Carter’s “malaise.” Gas lines, international problems, national embarrassment and a Russian bear looking more ominous.
Yet somehow if one was courageous enough to invest $100,000 at the beginning of the decade, it would have grown to $271,000.

I could go on with the history lesson, but suffice it to say that the 80’s decade rewarded $100,000 by growing to $453,000. In the 90’s it grew to$338,000.
This last decade, which was sort of known as the “lost decade” because of the dot.com/tech bubble, the real estate bubble. This resulted in two severe bear markets. Still investors were rewarded by having their portfolio vastly outperform the underlying cost of living and inflation.
So the lesson for all is that if one pays attention to events, you can always find a reason why it is not a good time to invest—and historically, you would have always been wrong!! I will not say anything about the world we find ourselves in today because we have always found ourselves in difficult times both domestically and globally—there have always been challenges and there always will—it is just the nature of the species.
As to the basic question: Is it safe? I’ll let you draw your own conclusions!

By Jim Hancock

References

Source of returns figures for the various asset classes utilized in the hypothetical portfolio: DFA Returns Software 2.0, Feb. 2011. Past performance is no guarantee of future results. Performance included reinvestment of all dividend and capital gains.

1.Taylor, Fred. “Commentary: Is It Safe?” Message to the author. 6 Aug. 2014. E-mail.

2. Matson Money. But This Time it Really is Different. N.p.: n.p., n.d. PDF. https://www.matsonmoney.com/

Bitcoin: Are you Missing Out?

Do you suffer from FOMO?  FOMO stands for Fear Of Missing Out.  Just about everyone suffers from this in one way or another.  Bitcoin is becoming more of a household word and it’s popularity is exploding. So what is bitcoin, and is it something you should invest in?

What is Bitcoin?

Bitcoin is a form of cryptocurrency that only exists in numbers on a computer screen, rather than an actual coin or physical dollar bill. It is a form of international currency and it is the first decentralized digital currency in the world.   You can buy bitcoin from any online bitcoin seller, by trading your dollars for bitcoin.  There are many other types of cryptocurrency now trying to surpass bitcoin in popularity.

Why is Bitcoin so popular right now?

The price of 1 Bitcoin started out close to $1 back in 2011, and now the price of 1 bitcoin is about $17,000. Even just a month ago it was well under $10,000!  That is some pretty extreme price fluctuation and growth.  Also, just recently, trading futures of Bitcoin became available, and ETF’s with Bitcoin are coming soon.

Should you invest in (buy) Bitcoin?

Investing in Bitcoin is much more similar to gambling, than it is to prudent stock market investing.   Yes, if you buy Bitcoin now, you could be filthy rich in a year, but you could also be completely broke too.   There is so many regulatory issues that Bitcoin has not made it through yet, and there have been several instances of bitcoin price manipulation and fraud.

My main suggestion when it comes to Bitcoin is to only use money that you absolutely do not need and could live without to invest in Bitcoin.  If you have the desire and want to try it out, go right ahead, but not with grocery or retirement money.

I have personally been watching the price of Bitcoin over the last few weeks, and the price swings have been pretty extreme on a daily basis.  The price volatility seems to be about 10 times more extreme than the price volatility of the stock market.   For now, most of the price swings have been up.

Over the coming weeks and months, you will hear many “investing gurus” or maybe even radio commercials hyping the potential to get rich investing in Bitcoin.

Buying Bitcoin without actually Buying Bitcoin

The prudent way to invest in Bitcoin, is by investing in a globally diversified stock portfolio.  In this way, you are in turn investing in some companies that buy, sell, and accept Bitcoin.  In this way you take a lot of the risk out of it, and get more steady returns.  Your Fear Of Missing Out senses might not be quenched, but you will be able to sleep better at night.

(Update: From the time I wrote this 2 days ago to now, the price of Bitcoin went up to over $18,000, and is now down below $17,000.)

By Jimmy Hancock

References

Solin, Dan. “Bitcoin in Perspective.” The Huffington Post, TheHuffingtonPost.com, 14 Dec. 2017, www.huffingtonpost.com/entry/bitcoin-in-perspective_us_5a2fd4e4e4b0bad787127002?utm_content=buffer00ef8&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer.

 

2017 Stock Market Update

The stock market has continued to have success. The big surprise of the year continues to be international stocks. The Matson Money International Stock fund is up 21.89% this year, compared to the Matson Money US Stock Fund which is up just 8.27%. The following is from the Matson Money quarterly update.

“The 3rd quarter of 2017 saw a continued increase in broad equity markets,  both at home and internationally. U.S. stocks grew by 4.48% as represented by  the S&P 500 index, and for a third consecutive quarter, international stocks  fared even better, with the MSCI EAFE index returning 5.47% for the quarter.  After lagging in recent quarters, small stocks surged ahead this quarter, with the MSCI EAFE Small Cap Index returning 7.52%, while the Russell 2000  Index delivered a 5.67% return.

The news cycle over the last quarter was dominated by natural disasters and escalating geopolitical tensions; specifically in rhetoric exchanged  between President Trump and North Korean leader Kim Jong Un. The  hurricanes that ravaged the Caribbean and displaced millions in Houston were great tragedies that impacted countless people and caused billions of dollars of damage. In times where events such as these elicit powerful negative  emotions and we see the massive damage and hurt that many people are going through, it can be difficult to not let that emotion bleed over into our perception of the overall economy or financial markets. It can seem intuitive to believe that the unexpected loss of billions of dollars of infrastructure and the collateral damage of lost businesses and millions of employees who are  temporarily out of work would have a tangible impact on our overall economy and therefore negatively impact financial markets, reversing the general upward trend.

However, as with many other seemingly logical intuitions  regarding the what’s and whys of stock market performance, this too is not reflected in reality. In both the current market and what we have experienced historically, the stock market has an uncanny ability to shake off bad news and move uncorrelated to whatever else may be happening in the news, in contrast to what people may expect.

When we look at negative catastrophic events that have occurred throughout history, whether it be war or natural disaster, equity markets have on average generated positive returns despite these calamities. When looking at the  subsequent 1-year return from the month in which the following event  occurred: Pearl Harbor, D-Day, the start of the Vietnam War, the eruption of Mount St. Helens, the S.F. Earthquake of 1989, 9/11, Hurricane Katrina, and Super Storm Sandy, we see an average return of 9.70% as measured by the S&P 500 Index. This included 6 positive years and 2 that were negative, or 75% positive years. Over the entire time-period for which we have data from 1926-2016, the average annualized return of the S&P was 10.04%, and 67 of the 91 years were positive, or 74% positive years. This data would  indicate that even some of the worst or most trying events in U.S. history did not result in the stock market behaving, on average, any differently than it did in any other year. Trying to predict the movement of the market based on geopolitical events or natural disasters proves to be the same folly as any other form of forecasting.

In the end, choosing a wise financial strategy, and sticking to it, can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.”

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 18 Oct. 2017. MS.

The Surprising Reason You Shouldn’t Buy the Best Mutual Funds

It seems like common sense to buy a product that is popular or seems to be doing well.  For example, a few of my friends will be buying the new I Phone X, largely because Apple has a proven track record of making successful and innovative phones.  As consumers, that is what we look for when buying things.

On a similar note, many investors think it is common sense to invest their money with a mutual fund manager that has proven to be the best by their performance, or track record.  It almost seems like that should be the only reasons to pick a mutual fund manager, is based on their track record.  But I am here to spoil that “common sense” belief when it comes to investing.

There has been recent research on this topic, which confirms decades of academic findings, suggesting you should avoid top-rated mutual funds.

“According to a new study by Baird Wealth Management Research, not only do mutual fund ratings not predict future performance, they may be reliable red lights that should warn you against buying a fund.  Baird analyst Aaron Reynolds asked the question “do fund ratings predict future performance?” Here’s what he found:”

“For US stock funds, the research found that ratings were negatively predictive of future performance, e.g. a high rated fund will perform worse than a low rated fund.”  How do you explain these results? Often, when a stock fund manager has a good year, it’s due to chance. ” 1

Further Proof

This is one of the myths of investing that Mark Matson talks about all of the time.  5 star mutual funds are the funds that have a great track record over the past few years and that seem to get everything right.  But check out this simple chart that further proves that Track Record Investing gives you below market returns.  2.

Average Annual Return       2007-2011            2012-2016

Top 30 Rated US Stock Funds from 2007-2011           5.07%                     4.35%

All US Stock Funds                                                   -0.12%                     12.04%

So the “top 30” funds from 2007 to 2011 beat the market as a whole by about 5%.   So lets say you read a magazine, saw a headline, or worse yet your investment advisor says to invest in one of these funds that “continually beats the market”.   You decide to buy in at the end of 2011.  2012 through 2016 come, and your fund gets beat by the market by 8% annually for 5 years.  That’s almost 40% total growth that you missed out on.  Plus you missed out on the 5 years that it beat the market because you got in based on the track record.

The Alternative Method for Deciding on Mutual Funds?

If looking at Track Record isn’t the best way to determine what funds to invest in, then what is?  How about academic studies?  Studies done by Nobel Prize winners show that investing in a globally diversified fund, that doesn’t try to beat the market, but just focuses on getting market returns and rebalancing is the best way to invest long term. 3.  You should not try to find a mutual fund that is going to beat the market, you need one that is going to get market returns and charge lower total fees.  Stock market returns over long periods of time are surprisingly high.  To get good long term returns, you don’t need to gamble or speculate.  Fund managers that try to beat the market not only often fail in their quest, but they incur much more costs to you the investor.

Track Record Investing could be detrimental to your long term retirement portfolio.   Don’t fall for the hot mutual fund headlines.

by Jimmy Hancock

References

1. Wasik, John. “Why You Shouldn’t Buy a Highly-Rated Mutual Fund.” Forbes. Forbes Magazine, 24 Mar. 2014. Web. 26 Mar. 2014. <http://www.forbes.com/sites/johnwasik/2014/03/24/why-you-shouldnt-buy-a-highly-rated-mutual-fund/>.

2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PDF. https://www.matsonmoney.com/

3. Matson, Mark. Main Street Money. Mason: Mcgriff Video Productions, 2013. Print.

Buy Apple Stock, or Diversify?

Diversification seems to be a buzzword that is thrown around by investment gurus way too often.  It is a feel good word that advisors use to sound intelligent and sophisticated.  That is fine and all, but most investment advisors and their clients do not even understand what true diversification in an investment portfolio really means.

What is Diversification?

Diversification is “A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” 1

How do I know if I am fully diversified?

This is where the water gets a little muddy.  This question will bring different answers from different advisors.  Some people would tell you that you need between 5 and 10 individual stocks to be properly diversified.  If you have only 10 stocks you are taking on extreme risk that is not necessary for you to have.   Odds are those 10 stocks are all in a similar place in the market.  Thus all 10 of them will be moving in a similar direction when a crash in the market comes.

Diversification is more than just the number of stocks that you are invested in, although that is very important.  As a result of the funds that our firm, Preferred Retirement Options, recommends, clients are invested in about 12,000 individual stocks.  The most important part about that is that we are invested in every sub category of the market in every free country in the world.  Large companies, small companies, international companies, distressed companies, growth companies etc.  We are investing in different economies and different technology.   It would take an extinction level event for all of those stocks to lose their value.   From the portfolios I have seen, most investors that work with an advisor are invested in only large US stocks in the amount of 500 to 1000 total stocks and call that well diversified.

Why is Diversification so important in your investment portfolio?

Take a look at this chart created by Matson Money. 2

This is a pretty technical chart so let me explain.  This is real data from 1970-2016.   If you were to invest in the S&P 500 you would have gotten a  10.3% return with standard deviation of 17.11.   Sounds great right.  But if you add bonds/fixed income, international stocks, small stocks and value stocks, you end up with a 10.49% return and a standard deviation of 11.59.   That is a higher return with less risk and less volatility.   That is what diversification can do for your portfolio.

When you hear some investment guy throw out the word diversification, now you can have an understanding of what it is, and maybe even teach them a little something about it.  If you want true diversification that lowers your risk and increases expected return, then give us a call.

By Jimmy Hancock

References

1. “Diversification Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 25 June 2014. <http://www.investopedia.com/terms/d/diversification.asp>.

2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.

First Half of 2017 Market Recap

2017 is more than half over now, and a lot has happened.  In case you haven’t heard, international stocks are killing it.  The Matson Money International Fund is up almost 14% through the first half of the year.   The following is commentary from Matson Money on the 2nd quarter in the markets.

The 2nd quarter of 2017 saw a continued increase in broad equity markets, both at home and internationally. During this time period, U.S. stocks grew by 3.09% as represented by the S&P 500 index, and for a second consecutive  quarter, international stocks fared even better, with the MSCI EAFE index  returning 6.37% for the quarter. After lagging behind for much of the previous couple of years, Emerging Market stocks once again led the way over  developed markets for the 2nd consecutive quarter. The MSCI Emerging Markets Index saw a return of 6.38% for the quarter, and is now up over 18%  year to date.

Over the course of the last year, we’ve seen strong market returns, the  lowest unemployment numbers we’ve seen in recent history, and continued low interest rates and low inflation. By almost any normal metric the economy  is looking very healthy and has for quite some time. During extended time  periods of good economic data and favorable stock returns, investors can sometimes begin to feel euphoric – like things will stay good forever. In fact,  over the last 18 fiscal quarters, the S&P 500 had a positive return in 17 of them, with only one negative return in the 3rd quarter of 2015.

In times when markets are down and seem as if they are never coming back up, we stress  that it’s extremely important not to lose sight of one’s long term goals, not  to panic, and to use downside volatility as an opportunity to rebalance and buy  more equities. These same principles apply during bull markets as well. That  euphoric feeling that investors can feel when it seems like markets will go up  forever can lead to imprudent decisions in the same way fear can in a down  market. Investors tend to overestimate their aversity to risk in these market  conditions and take on greater exposure to equities than their true risk tolerance would dictate. In both scenarios, it is important to not get caught up  in recency bias – assuming that whatever is happening in the short term will persist into the long term. Short term trends are just that – short term.  Throughout the life of the stock market bull markets have been followed by bear markets and vice versa many times over.

It is an important distinction to understand the difference between academically proven ways in which  markets move as compared to short term trends. Over the long term, equities have outperformed risk free investments such as treasury bills, but this is not going to be true over every short time period. Similarly, small stocks and value stocks have outperformed large stocks and growth stocks respectively, but again, this isn’t necessarily true over the short term. In fact, looking back historically, sometimes investors have had to wait many years before these  various premiums have shown up, but the prudent investor who understood  that these premiums are pervasive in the long term and have ignored short  term trends have very often been rewarded for doing so. That is why it is so  important to own a diversified portfolio built specifically for your personal risk  tolerance, to stay prudent and to keep that portfolio through the ups and  downs of the market, and to rebalance when the opportunity presents itself.

In the end, choosing a wise financial strategy – and sticking to it – can have  tremendous impact on an investor’s long term financial health. Chasing  performance through buying and selling is a risky game. Historically speaking,  it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes  and the return of the market.

By Jimmy Hancock

References

  1. 2017 Happy New Year Sign. Digital image. Vectoropenstock.com. N.p., n.d. Web. 25 July 2017.
  2. Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS.

Goldman Sachs down 5%…Buy or Sell?

If you heard that your favorite store just lowered all of their prices by 5%, you would obviously be excited and go there to buy things on sale.   But for some reason that mindset usually leaves people when it comes to stocks.  People are afraid to buy stocks that are “on sale”, but love buying stocks that just “raised their prices”.

Mark Matson, founder and CEO of Matson Money, just recently went on CNBC to discuss this topic, and a few other important investing principles.  You would think the people he is discussing this with would understand basic principles like buy low and sell high, but apparently not.

Check out the 2 minute video by clicking on this link.  http://markmatson.tv/fist-fight-on-cnbc/

By Jimmy Hancock

References

  1. Fist Fight on CNBC. Perf. Mark Matson. CNBC, 2 May 2017. Web. 3 May 2017.



2017 1st Quarter Stock Market Recap

Yes, the stock market has been doing well, but just how well and what categories did the best?   As it turns out, a big theme for the first quarter was the big returns from diversifying internationally.  Matson Money’s International Fund was up 8.02% in just 3 months.

Below is commentary from Matson Money about the 1st Quarter in the market.

The 1st quarter of 2017 built upon a strong 4th quarter and continued to provide positive returns across broad markets. Many members of the media and so-called “experts” warned of a financial downturn resulting from Donald Trump being inaugurated as President, but it seems as if these predictions were unfounded, with stocks up worldwide since President Trump took the reins. U.S. stocks performed well in the first quarter, with large stocks leading the way up 6.07% as represented by the S&P 500. However, despite the warnings of some pundits that President Trump’s protectionist policies would sink international stocks, both developed and emerging market stocks saw an even greater lift than those domestically, with the MSCI EAFE Index index up 7.39% and the MSCI Emerging Markets Index up 11.49%.

 d
This overperformance by international equities as compared to domestic equities marked a contrast to what we have seen over the last few years, and can be a great lesson for investors. Leading up to 2017, the five-year period ending in 2016 saw the S&P 500 gain 98% while the EAFE was up only 40%. Naturally, many investors fell into the trap of thinking that this was the “new normal” and that it was prudent to invest in all U.S. stocks and ignore those abroad. The only thing that is “normal” about this performance disparity is that when one invests in different asset classes with the goal of diversification, they get just that – asset classes with dissimilar price movements, which is the earmark of diversification. This time period is one of many that can highlight why this kind of diversification is a good thing and is so important for investors. Without a crystal ball to tell an investor which of the asset classes will perform better over any short-term period, it can be extremely detrimental to be over-weighted in any one and take asset class specific downside risk or miss out on a boom in another. Consider the following example of varying five-year periods of U.S. equity (S&P) performance as compared with international (EAFE):
1971-1975 – EAFE outperformed the S&P by 48%
1979-1983 – S&P outperformed the EAFE by 60%
1984-1988 – EAFE outperformed the S&P by 257%
1989-1993 – S&P outperformed the EAFE by 85%
1995-1999 – S&P outperformed the EAFE by 166%
2002-2006 – EAFE outperformed the S&P by 70%
2012-2016 – S&P outperformed the EAFE by 58%

 d
When looking at this most recent period through the lens of history, it no longer appears to be an extraordinary shift in market paradigms; rather it can be viewed as just another of the many examples of U.S. and international stocks performing differently. What IS truly  extraordinary is that during this entire period (1971-2016), both asset classes had an average annualized return of 10% per year – these returns just occurred unpredictably at different times. It can be challenging to not get caught up in a current trend, but taking a more prudent, historical outlook can prove to be rewarding. For investors who chose to forsake diversification and chase what had recently been hot, they may have missed out on potentially sizable returns.

 d
In the end, choosing a wise financial strategy – and sticking to it – can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.

By Jimmy Hancock

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS. N.p.
  2. Globe with International Flags. Digital image. Freeimageslive.co.uk. N.p., n.d. Web. 25 Apr. 2017.

 



How I Beat Vanguard Index Funds

You have probably heard of an Index fund, but you might not have heard of an Institutional fund.  Index funds seem to be getting more and more popular as a means for investing with minimal fees, but institutional funds have been outperforming index funds, and I will show you how.

Index Funds

These type of mutual funds are not actively traded, and the only purpose of the fund is to keep the stocks in their fund that are listed in specific index.  For example, the S&P 500 is an index made up of the 500 largest publicly traded companies in America.  Thus a S&P 500 Index fund would hold those 500 stocks, and that is all.  When the list of 500 companies changes, they sell the companies that exited the list, and buy the companies that jumped into the list.

Institutional Funds

Institutional funds are similar to index funds, but go 1 step further.  These type of mutual funds dont worry about what is listed in indexes, but have specific criteria for evaluating each stock.  They put each of the publicly traded stocks throughout the entire world into different categories based on size, country, and other factors.  They then take those categories and weight them based on nobel prize winning studies like the 3 factor model and modern portfolio theory.   They then can be specifically weighted in a investors portfolio based on each investors risk preference, which is decided by the investor and the advisor together.

The Proof is in the Pudding

Lets compare index funds to the institutional funds offered through us, aka Matson Money.  We will look at real average annual returns over the last 16 years from 2000 through 2015 for a few different sectors of the market.   Note, all of the numbers shown are after subtracting of all mutual fund management fees.

Large Cap Value Funds:  

Vanguard Index Fund- 5.14%

Institutional Fund Used by Matson Money- 7.65%

International Large Value Funds:

Vanguard Index Fund – 3.08%

Institutional Fund Used by Matson Money- 5.03%

International Small Cap Funds:

Vanguard Index Fund – 6.61%

Institutional Fund Used by Matson Money- 8.38%

Micro Cap Funds:

Vanguard Index Fund – Not Offered

Institutional Fund Used by Matson Money 9.02%

International Small Cap Value Funds:

Vanguard Index Fund- Not Offered

Institutional Fund Used by Matson Money- 9.91%          1. 

Seeing the data above, I would like to point out another other obvious advantage of institutional funds.  Institutional funds allow for everyday investors to get into sectors that you cannot get into with Index funds, like micro cap (very small companies), International Small Value, and Emerging markets Small and Value (Countries that are less established).  Returns in those categories have been huge going back 16 years as well, as you can see above.

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To get slightly more technical, I have included a few more important weaknesses of index funds as written by Dan Solin in a recent article.

1. Flexibility When to Buy and Sell Stocks

An index fund buys and sells stocks when they enter and leave the index. An institutional fund has the ability to reduce turnover and increase tax efficiency by establishing a range that permits it to hold a stock even if it drops out of the index.   2. 

2. Flexibility in Stock Selection

An institutional fund can establish a screen to exclude categories of stocks with historically poor returns, like initial public offering stocks. An index fund manager does not have this flexibility.  2. 

3. Use of Block Trading Techniques

There are sophisticated trading techniques a small cap, institutional fund manager can use that are not options for index fund managers. Because the market for these stocks is relatively small, and dumping a large block can affect the stock price, an institutional fund may be able to buy these stocks at a favorable price from a seller who has an urgent need to liquidate holdings. 2. 

If you want to beat Vanguard Index Funds, call us at 208-522-4961, email jimmy@proinvestmentcoach.com, or find out when we are doing our free investing class in your area by clicking on this link Upcoming Events

By Jimmy Hancock

Jimmy Hancock is an Investment Advisor Representative for Preferred Retirement Options, an RIA in Idaho.



References

1. Matson Money.  Investor Jeopardy Powerpoint. Mason, OH: Matson Money, 28 Mar. 2017. PPT.

2. Solin, Dan. “Solving the Mystery of Passive Asset Class Investing.” The Huffington Post. TheHuffingtonPost.com, 21 Jan. 2014. Web. 23 Jan. 2014. <http://www.huffingtonpost.com/dan-solin/solving-the-mystery-of-passive-asset_b_4627737.html>.

3. Vanguard Investments Logo. Digital image. En.wikipedia.org. N.p., n.d. Web. 28 Mar. 2017.