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.

Click here to Download our free Investor Awareness Guide

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.

2016 Stock Market Recap

Many people look at 2016 from different angles, but the stock market was an obvious positive to finish the year.  In 2016 the Matson Money US Equity Fund (Diversified US Stocks) was up over 21%, and the Matson Money International Equity Fund (Diversified Intl. Stocks) was up over 8%.  The following is an insight article from the Matson Money client statements about what we can learn from what happened with the election and the stock market.

“The 4th quarter of 2016 was a memorable one in the United States for many reasons. We  experienced the most partisan and unique election season in recent memory, culminating in an election result that few expected. The news of a potential Donald Trump presidency  brought forth many pundits clamoring to give their opinion on how it may affect the stock  market and the economy as a whole.

 
Prior to the election, on Fortune.com, Katie Reilly reported that Citigroup predicted that a Trump win would have a negative effect on the stock market, believing the S&P 500 index would fall 3% to 5% if Trump was elected. Evelyn Cheng reported on CNBC the day before the election that JP Morgan, Barclays, Citi, and BMO all expected a Trump victory would have a negative impact on the stock market, with Barclays being as bold as saying the S&P 500 could potentially fall 11 to 13 percent.

 
Some went even further with their market predictions. Simon Johnson of MarketWatch wrote:
“The election of Donald Trump…would likely cause the stock market to crash and plunge the world into recession.”

 
In an interview with Neil Cavuto, noted billionaire Mark Cuban stated:
“In the event Donald wins, I have no doubt in my mind the market tanks,” Cuban said. “If the polls look like there’s a decent chance that Donald could win, I’ll put a huge hedge on that’s over 100% of my equity positions… that protects me just in case he wins.”

In addition to many analysts predicting a drop, the stock market itself seemed to be indicating the same thing. When FBI director James Comey  announced on October 28th, that he had reopened an investigation into Hillary Clinton’s email server, the betting markets reacted favorably to Trump winning, but the stock market reacted negatively, with the S&P 500 sharply reversing gains and dropping almost 1% intraday. Even more starkly, on election night itself, as results started pouring in showing key states falling to Trump, DOW futures fell as much as 750 points.

Given this information, many investors may have had the inclination to feel uneasy about the performance of the equity markets following the election. Those that reacted to this emotion may have sold stocks and moved their money to cash or bonds. Unfortunately for those that made this decision, the prevailing market predictions of downward volatility proved to be unfounded; in fact just the opposite occurred. From November 1st through the end of the year, equity markets had a substantial growth period, with the S&P rising 5.75%. However, while this is most certainly a fine return over 2 months, investors who diversified their portfolio beyond just U.S. large stocks may have seen even greater returns. Small cap stocks as represented by the Russell 2000 rose 14.27%. But not to be outdone, the Russell 2000 Value, an index of small value stocks, increased 17.95%.

Hopefully investors will remember this period of time not just because of the election result, but as a great lesson that trying to predict the short term move of the stock market – even when it may seem so evidently clear that it will move a certain way – can be folly and cost you  dearly.

 
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. 16 Jan. 2017. MS. N.p.
  2. The Financial Markets Have Accepted a Trump Presidency. Digital image. Au.anygator.com. N.p., n.d. Web. 16 Jan. 2017.

Books Make the Best Christmas Presents

main street moneyChristmas time is here again! This is the time I get frantic about finishing up buying gifts for everyone on my list.   To those who are interested, books make great gifts.  We can offer you the book “Main Street Money” by Mark Matson for free this holiday season.   This book is perfect for your spouse, parent, or child looking for not just good, but great financial advice.  This book is a simple and personal text with some invaluable information on investing, retirement planning and the like.

If you have not read the book Main Street Money yet, here is a brief into explaining why Mark Matson wrote this book and how it can help you to receive investing peace of mind.  The following is a direct quote from the introduction to the book, “Main Street Money”.1.

“Chances are you’re one of the 95 percent of Americans who are destined to retire broke. It’s not really your fault. Goodness knows it’s confusing out there for the average American trying to secure their financial future. Contradictory advice and information, misleading promises, portfolio-gutting investment strategies – and that’s just from my fellow Wall Street investment professionals. Maybe that’s why the finance industry’s leading lights can be counted on to say one thing one year and the opposite the next. Market timing? It will never work. Oh wait, yes it can. Asset allocation? A big winner – until a real bear market comes around. Buy and hold? The best thing since sliced bread. That is, until the market tanks and the buy and hold model is tossed onto the scrap heap by so-called market experts.

It’s almost like financial professionals want to confuse the investing public. Where is the continuity? Where is the unvarnished truth about investing strategies? Why won’t anyone step up to the podium and admit that nobody can predict the future? After all, people scoff at astrologers and tarot card readers. But some guy in a suit and hang a “stockbroker is in” sign on his door and people can’t wait to see what he has to say during a bull market or during the latest market crash. There is no shortage of talking heads who pretend they have the forecast about the future that will magically allow you to own all of the best stocks and get into and out of the market at the perfect time.

These prognosticators prey on the psychology of Main Street investors. Often causing them to take risks they don’t understand and lose more money than they could possibly imagine. I call these posers Bullies because they take advantage of investors to line their own pockets with your hard-earned money. The money you will need for your retirement and most important life dreams. But it doesn’t have to be that way. I can teach you how to outwit, outsmart, and out invest the biggest Wall Street Bullies and icons. And help you create true peace of mind in your investing experience. And the good news is that it is not that hard. Once you are armed with the basic knowledge you need, you can adopt an investment philosophy and strategy beats the vast majority of all the blow-hards on Wall Street. You will soon see that your problems are their profits – the trick to getting their hands out of your pockets once and for all. Make no mistake, Wall Street does not want you to read this book and they don’t want you to take the actions outlined in this book.”  

If you would like a copy of this book, get in touch with us and we can get one for you at no charge to you.  We give out copies at our monthly coaching classes.  It is our job to educate investors about the wall street bullies.

References

Matson, Mark. “Changing the Status Quo.” Introduction. Mason, OH: Mcgriff Video Productions, 2013. IX-X. Print.





You Can’t Afford to DIY Investing

do-it-yourselfWith the proliferation of the Internet and continued expansion of online investment tools, the role of an Investment Advisor is now of crucial importance. Personal investors have access to more information than they ever have before, but wading through the data to find that path to success and discipline still requires the eye of a trained investment coach. Given the daunting amount of different investment advice, options, funds, accounts,  stocks, bonds, annuities, and timelines available to investors planning for your future is intimidating to say the least. When you take the inherent danger that follows bad investments into consideration , it quickly becomes clear your retirement isn’t worth that risk, and should instead be left to a professional. The following five points are some of the more common DIY investor mistakes that a qualified investment advisor can help you avoid, while better planning for your future.

1) Buying “cool” stocks, or giving too much attention to brand loyalty
This is one of the most common mistakes of beginning investors. Although you might feel a certain pull to invest in a company whose products you already support, it’s important to remember that you’re not buying their product; you’re buying their future performance as a company. In the long run the advantage of having a globally diversified portfolio is much bigger than the cool feeling you get when you buy your favorite companies stock.  Remember, your investments’ future earnings are more important to your well being than owning a fraction of a “cool” brand.  On top of this, usually the “cool” stocks that people buy are extremely massive companies, which have a lower expected growth rate than small cap companies.

2) Investing too conservatively
With the previous point in mind, it’s important to not be overly conservative when it comes to planning your future. Ever since the crash of 2008 new investors have been very skittish when taking on risk, many opting out of the stock market entirely. That being said, it’s important to remember the old adage that “without risk, there is no reward.” A financial professional can better assess the highs and lows inherent with ownership of  stocks. A more evenly balanced portfolio (that means one with stocks), while carrying an additional degree of risk, offers much greater rewards to the investor, and under a watchful eye it will continue to grow for years to come.

3) Hoping to beat the market “bad gambling”
This tip, more than almost any other, is extremely important to new investors. We’ve all seen a movie or heard a story with someone offering “a deal too good to be true,” and when it comes to investing that old cliché is worth its weight in gold. While we can all think of an example when a company’s stock value went through the roof seemingly overnight, it’s important to remember for every success story there are many more of failure and bankruptcy. Putting everything on a single stock or position is just as risky as taking your life savings to Vegas and hoping for the best at a roulette table. Any investment you care about should be made as part of a balanced portfolio and a long-term plan.

4) Thinking they are saving money by not having an advisor
This is a very common thought by most do it yourself investors.  They think with the advisor out of the picture they take out the middleman and thus lower their investment costs. The problem with this thinking, is that it is completely wrong in most cases.   Online, the extremely high fees for trading must be paid.  Depending on the website, they usually run $7 to $10 per trade.  If you are diversified like you should be, that would be hundreds if not thousands of dollars just to buy into all the stocks you should be holding.   The advantage to working with us is that there is no fee per trade.  You are no longer treated as an individual investor and thus you have a flat discounted fee no matter how many trades are made in your account.

5) Ignoring your investment horizon
To be frank, you need an investment coach to accurately accomplish your goals. Many new investors forget that investments are made for a purpose, and if you don’t have access to your money when you need it that investment has failed you. Different accounts have different tax implications that must be matched with your time horizon and age.  If you are putting away money for retirement that is not for 20 years, then you should not invest your money conservatively.  Your risk tolerance should be directly correlated with your time horizon for your investments.  You can be more conservative with investments that you will need in a short time frame.

By Jimmy Hancock

References

Do It Yourself Lobotomy. Digital image. Smithlhhsb122.wikispaces.com. N.p., n.d. Web. 21 Nov. 2016.

Elections Impact on the Stock Market

trump-hillaryIt seems to be all anyone can talk about for the last few months.  This is a very strange election year with crazy headlines and stories to go along with it.  So we have gotten the question “How will the presidential election effect the market?” just about every day.   For questions like this I am glad I have my crystal ball with me at all times so I can tell my clients exactly what is going to happen.  O wait, I don’t have a crystal ball.

Historic Returns

Looking back at election years since 1928, the S&P 500 (Large US Stocks) has had a positive return 21 times, and a negative return 3 times (1).  I think most people would find that hard to believe.   From another source I found this interesting data.

“Since 1833, the Dow Jones industrial average has gained an average of 10.4% in the year before a presidential election, and nearly 6%, on average, in the election year. By contrast, the first and second years of a president’s term see average gains of 2.5% and 4.2%, respectively. A notable recent exception to decent election-year returns: 2008, when the Dow sank nearly 34%. (Returns are based on price only and exclude dividends.)  But no one needs to tell you that the current cycle is anything but average. The Dow racked up an impressive 27% in the first year of President Obama’s second term, and 7.5% in year two. Last year, which was supposed to be the strongest of the cycle, saw the Dow Industrials drop 2%.” (2)

Republican vs Democrat

This is another interesting topic that divides people throughout the country, but is there any stock market effect based on which party gets into power?  Looking at the numbers, since 1900 Democrat presidents have been slightly better for stocks than Republican presidents.  The Dow (US Large Stocks) return when a Democrat President was in office was about 9%, vs the nearly 6% when a Republican was running things.   But normal variations in annual stock market returns dwarf that difference, says Russ Koesterich, chief investment strategist at BlackRock.  (2)

False Patterns

The worst thing an investor can do is get caught up in trying to find and take advantage to patterns in the stock market.  It seems like a good idea, but trust me, it is not in your best interest.   For example, there is a super bowl stock market predictor, which states that if the team that wins the Superbowl is a team that had its roots in the original National Football League, then the stock market will decline.   There is another pattern showing that every mid decade year ending in 5 (1905, 1915, 1925 etc.) since 1905, has been an up year for stocks. (1)  These patterns are just random facts that people try to turn into something that seems important.

In Conclusion

So the best and most honest answer to the question “How will the presidential election effect the market?”, is “I don’t know, but over the long term, stocks have made between 9 and 12% per year on average.”

By Jimmy Hancock

References

1.Anspach, Dana. “How Does the Stock Market Perform During Election Years?” The Balance. About Inc., 16 Oct. 2016. Web. 01 Nov. 2016.

2. Smith, Anne Kates. “How the Presidential Election Will Affect the Stock Market.” Www.kiplinger.com. The Kiplinger Washington Editors, Feb. 2016. Web. 01 Nov. 2016.

3. Donald Trump and Hillary Clinton Together. Digital image. Fabiusmaximus.com. N.p., n.d. Web. 1 Nov. 2016.





3rd Quarter Returns: I Told You So

making-moneyThe weather was not the only thing that was hot from July to September, but your investment portfolio most likely was as well.  Let’s just hope you stayed disciplined to receive the tough returns.  The following is an excerpt from the Matson Money quarterly statement.

“The 3rd quarter of 2016 provided much smoother sailing for the equity markets as compared to the occasionally tumultuous quarters that preceded it. 2016 began with significant downside volatility in the early part of the year, followed by geopolitical uncertainty surrounding the Brexit referendum vote, and it seemed like choppy waters was the new norm in the global marketplace. However, despite the talking heads making dire warnings, Matson Money’s recommendation to practice prudence proved to be sage advice, with post-Brexit markets have providing consistent upward movement over the last few months, with the S&P 500 index gaining 3.85% for the quarter, and international stocks as represented by the MSCI EAFE index rising 6.50%.
Another shift began to emerge recently, while U.S. large growth stocks had been one of the higher if not highest performing equity asset classes for much of past few years, we began to see a reversal of this over the last few months. Compared to the 3.85% return of the S&P 500 index in the 3rd quarter, we saw a gain of 9.05% out of small stocks as represented by the Russell 2000 index. In addition, the Russell 2000 Value index which represents small value stocks gained 8.87% for the quarter and is now up 15.49% year to date, as compared to only 7.84% for the S&P 500. We have also seen a resurgence in international stocks, which had also lagged U.S. stocks in recent memory. The MSCI Emerging Markets Index rose by 9.15% for the quarter and is now up 16.36% for the year, while the MSCI EAFE and EAFE Small  Value – benchmarks for international large stocks and international small value stocks – had gains of 6.50% and 9.78% respectively for the quarter.

This recent shift can be a good lesson for investors. While we don’t know if or how long these trends will persist into the future, we do know that historically there have been premiums associated with holding small and value stocks, and there have been time periods in which international stocks have outperformed U.S. stocks. The recent occurrence over the last couple of years of large U.S. growth stocks being a great performing asset class can tempt investors to become myopically focused and assume that these familiar stocks will continue to perform well into perpetuity. This mindset can result in eschewing diversification and ignoring academically known premiums, which can lead them to make sub-optimal decisions within their investment portfolios. This can be a costly mistake. Diversifying beyond US large stocks has historically had a great impact on an investor’s performance. From 1/1979 – 09/2016, the S&P returned 11.68% a year. However, during this same time period, U.S. small value stocks returned 12.99% as shown by the Russell 2000 Value Index.

A seasoned investor is aware that perceived trends and market cycles come and go, and it is extremely difficult to know when it is happening. They know that staying invested in broadly diversified portfolios that are designed to take advantage of academically known premiums can result in a positive investing experience over a lifetime.

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. 17 Jul. 2016. MS. N.p.

2. How to Make Easy Money Online. Digital image. Fgfinder.com. N.p., n.d. Web. 11 Oct. 2016.