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.

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.

 



Don’t Sell International Stocks, Here’s Why

internationalToday I would like to tackle the question, why should I be invested internationally?  This question has been asked by investors more frequently after the horrible year’s international stocks had in 2014 and 2015.  So lets look at the data and see if there is any reason to keep international stocks in your portfolio.

International Stocks in 2014-2015

Every sector of international stocks lost money in 2014.  In 2015, International Large sector lost about 3% and international large value sector lost over 6%.  The Emerging Markets sector (stocks in countries that are “emerging”) was down almost 16%.  *1.  Meanwhile the S&P 500 (US Large companies) was positive in both 2014 and 2015.  You are probably wondering why everyone doesn’t just invest in Large US companies?

International Stocks 2000-2015

2000 through 2015 was not necessarily a great time period for any sector of the market, but international stocks definitely held their own.  US Stocks are in blue, International Stocks are in green.

Category                           2000-2015 Annual Return

S&P 500 Index                           4.03%

Intl Large Value index                5.03%

Intl Small index                           8.38%

Intl Small Value                          9.91%

Emerging Markets Value           7.04%

Emerging Markets Small           8.55%

*1. Obviously this chart doesn’t include every sector, but it illustrates a very important point.  International stocks are extremely valuable in your retirement portfolio, but you also have to be diversified in your international stocks and not just own international large stocks, like most of the population.  Most retail investment advisors cannot get you into categories like international small value and emerging markets small.

International Stocks From the Beginning

Accurate records for international stock data goes back only to the 1970’s, but lets take a look at the data going back to then.  International Large stocks return from 1973 to 2015 was 8.92% per year.  International Small Stocks during the same time period had a jaw dropping return of 12.84% per year.   *2.   This further proves that there is a long term advantage to having a diversified mix of international stocks in your portfolio.

 

A lot of investors get caught up in what is happening in the market over the last minute, day, month, or year.  It is important to keep the long term perspective and stay diversified no matter how hard it is to not drop out of sectors that are under performing in the short term.

by Jimmy Hancock

References

1. Matson Money. Investor Jeopardy Powerpoint. Mason, OH: Matson Money, 19 Jul. 2016. PPT.

2. Matson Money. Portfolio MRI. Mason, OH: Matson Money, n.d. PDF.





Post Brexit Positivity?

Ever wonder if there is anything on the news media that wasn’t focused on negativity, fear, and panic?  Lucky for us when Mark Matson, CEO of Matson Money, goes on the news media he takes a very different approach.  He focuses on real long term investing principles rather than what investors should do based on the big fear of the moment.

So the Brexit vote happened, and there has been a lot of discussion about the downward spiral it would send the world into.  This video clip is via Fox Business and is Mark Matson’s take on the stock market and world after the Brexit vote.

Instead of a regular blog this week, I want you to watch this quick 3 minute video that teaches quite a few good investing principles.

http://markmatson.tv/brexit-on-fox-business/

(note: you have to click on the link to view the video, not the picture)

 

mark fox business brexit

By Jimmy Hancock

References

Brexit on Fox Business. Perf. Mark Matson. N.p., 1 July 2016. Web. 1 July 2016.

 





How to Beat the S&P 500

The S&P 500 is a grouping of the 500 largest companies in America.  It is a very popular thing to invest in for many reasons.  First of all, it is made up of incredible companies that we all know and love like Google and Apple.   But, another reason is, the business and financial media puts a lot of emphasis on shoving the current price and up or down movement of the S&P 500 in our faces every single day. For people that don’t know as much about investing, why would they even think there is something else to invest in then the S&P 500.

We recently met with a young man that was investing in only a low cost S&P 500 index fund.  He could not understand how he could pay a higher fee for a diversified portfolio, and end up with a huge advantage long term.   Let me explain further.

There are over 13,000 total stocks in the world that are available to invest in.  So the 500 stocks in the S&P 500 make up less than 5% of the total stock market.  So you cannot really consider yourself diversified if you invest in only 500 stocks in one country that are all very large companies.   If you could, wouldn’t you want to be more spread out into different countries, different industries, and different sizes of companies.  That way when 1 industry or country has major issues, your portfolio isn’t killed.

I’m here to tell you it is possible to beat the S&P 500 in terms of annual return, be more diversified, and lower your risk (Standard Deviation) all at the same time.

The mountain chart below shows that 3 globally diversified Matson Money Portfolios, with risk levels below or similar to the S&P 500 have absolutely blown away the returns of the S&P 500 for the long term 15 year period of 2000-2014.  And the Matson Money Portfolios shown below are Net of Fees, meaning this is the return after all fees are taken out. 1.

S&P

As you can see, the S&P 500 (100% stocks) was well below the Balanced Growth Portfolio, (50% stocks, 50% fixed income) the Long Term Growth Portfolio (75% stocks, 25% Fixed Income), as well as the Aggressive Growth Portfolio (95% stocks, 5% Fixed Income).    If you invested $100,000 into the S&P 500, your gain would be $86,482 at the end of 2014, which is about half the $162,523 gain you would have received investing in the Aggressive Growth Portfolio with Matson Money over the same time period.

Although the S&P 500 is popular, and has been up lately, that doesn’t mean you can forget the long term projections and academic studies that have proved again and again that a efficient diversified portfolio beats the S&P 500 in the long term.

By Jimmy Hancock

References

  1.  Matson Money. IsSomethingWrongWithOurPortfoliosPowerpoint. N.p.: Matson Money Inc., 6 Apr 2016. PPT.

Your Investment Portfolio is not Diversified

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 may be invested in as many as 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

matson diversification

This is a pretty technical chart so let me explain.  This is real data from 1970-2013.   If you were to invest in the S&p 500 you would have gotten a  10.4% return with standard deviation of 16.94.   Sounds great right.  But if you add bonds/fixed income, international stocks, small stocks and value stocks, you end up with a 10.99% return and a standard deviation of 11.07.   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.

Second Quarter Market Recap

newsThe second quarter saw continued small increases in the stock market almost across the board.  The only real loser is the owner of long term fixed income, as rates increased bringing prices down rapidly.  The S&P 500 Index (Large Cap Stocks) rose 0.28% in the quarter, extending its streak to ten consecutive quarters of positive gains. However, for this quarter once again, international equities outpaced U.S. stocks, with the MSCI EAFE Index (International Large Stocks) increasing 0.84% and the MSCI EAFE Small Cap Index (International Small Stocks) rose 5.88%.  1.

The Free Market (Matson Money)  Funds:  Year to Date Returns   1.

US Equity Fund: 2.20%

International Equity Fund: 7.23%

Fixed Income Fund:  0.39%

What can we learn?

The following is education from Matson Money on what we can learn from the recent market trends.

“The market performance over the last several quarters can serve as an educational opportunity for investors. In 2014, the market saw U.S. large cap stocks performing well compared to small cap stocks and international stocks, which could have driven investors to become overly focused on S&P 500 companies. In the most recent quarters however, tides have turned. In 2015, international equities and U.S. small cap stocks have both significantly outperformed U.S. large cap stocks, and investors who became too myopically focused and had forsaken  diversification by neglecting these asset classes would have missed out on the returns.”  1.

“Those investors who are not educated and disciplined with the help of an adviser can easily fall prey to the next trend or news story that will seemingly impact the financial markets. The current occurrence of this is the headlines of the impending Greece default and potential exit from the Eurozone. Those listening to news anchors or reading financial news may be tempted to think that this global economic uncertainty will throw the EU into a tailspin and have a ripple effect across the global stock market. In reality, there have been 47 country defaults since 1975, and the global equity markets have continued to thrive and create wealth for investors over the long-term despite these defaults. “This time is different” is often championed by those in the media, but it is commonly an overused sentiment; the situation in Greece is no different. Prudent investors know that current economic conditions should not change the strategies chosen to accomplish one’s long-term goals.”  1.

By Jimmy Hancock

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2015. MS. N.p.

2. Newspaper Clip Art. Digital image. N.p., n.d. Web. 16 July 2015. <http://4.bp.blogspot.com/_apRR_RXoSFE/TEbR89f4k8I/AAAAAAAADp8/s3dFXg2WYUg/s1600/newspaper_bw.jpg>.

First Quarter Market Recap

stock marketThe first quarter of 2015 saw continued gains in most areas.  The S&P 500 (U.S Large) Index rose 0.95% for the quarter, posting its 9th quarter in a row of gains.  A broader defined U.S. stock market fund which includes small and value stocks returned 1.61%. (Matson Money U.S Equity Fund)

Fixed income was in a similar boat as the Free Market Fixed Income Fund was up 0.78%

International Comes Back

These returns were trumped by the much hated international sector of the market.  If you can recall last year almost every international sector was a negative for the year.  But this quarter was obviously a different story with the Free Market International Equity Fund (International Large and Small) boasting a 3.72% return, more than tripling the S&P year to date.

Market Timing

All of those investors that ditched international after its poor year last year are already starting to see their mistake.  U.S stocks have seen the biggest outflow of money since the memorable month of October 2008.   Too bad they already missed a huge buying opportunity when international was low, and missed the run up as well.

The following is a direct quote from Matson Money in their first quarter statement.

“A couple of years or even months of gains or losses often turn investors who have planned on a thirty-year investment time horizon into investors with only a yearly/monthly time horizon.  When investors see losses, they want out; when they see gains, they want in.  The tendency of investors to extrapolate recent trends in stock prices is well documented.  A 1998 study by Clark and Statman found that investment newsletter writers become optimistic after increases in stock prices and pessimistic after decreases.  This inclination to make decisions based only upon recent stock movements is a natural, human emotion-based error.  However, these types of emotional reactions to the market force investors to break from the proven rules of prudent investing: buy low/sell high.  Resisting the temptation to take action because of an emotional reaction is an aspect for which an investor’s self-control is an important first line of defense.  The experience and knowledge of an investment adviser combined with an upfront agreement between adviser and investor can provide a necessary second line of defense when self-control isn’t enough.  ”

by Jimmy Hancock

 

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2015. MS. N.p.

Why Should you be Invested Internationally?

globeToday I would like to tackle the answer to the question, why should I be invested internationally?  This question has been asked by investors more frequently after the horrible year international stocks had in 2014.  So lets look at the data and see if there is any reason to keep international stocks in your portfolio.

International Stocks in 2014

Every sector or international stocks lost money in 2014.  International Large and international small both lost about 5%,  The Emerging Markets sector (stocks in countries that are “emerging”) lost about 2%.  *1.  Compared to the strongly positive S&P 500 (Large US Companies)  performance last year these returns are embarrassing.  You are probably wondering why everyone doesn’t just invest in Large US companies?

International Stocks 2000-2014

2000 through 2014 was not necessarily a great time period for any sector of the market, but international stocks definitely held their own.  US Stocks are in blue, International Stocks are in red.

Category                           2000-2014 Annual Return

S&P 500 Index                           4.24%

Intl Large Value index                4.35%

Intl Small index                           7.57%

Intl Small Value                          10.32%

Emerging Markets Index           7.38%

Emerging Markets Small           9.80%

*1. Obviously this chart doesn’t include every sector, but it illustrates a very important point.  International stocks are extremely valuable in your retirement portfolio, but you also have to be diversified in your international stocks and not just own international large stocks, like most of the population.  Most retail investment advisors cannot get you into categories like international small value and emerging markets small.

International Stocks From the Beginning

Accurate records for international stock data goes back only to the 1970’s, but lets take a look at the data going back to then.  International Large stocks return from 1973 to 2013 was 9.51% per year.  International Small Stocks during the same time period had a jaw dropping return of 13.39% per year.   *2.   This further proves that there is a long term advantage to having a diversified mix of international stocks in your portfolio.

International stocks in 2015

I just wanted to briefly mention that year to date, international Large stocks are beating US Large stocks by over 3%.  *3.    So those of you who sold out on international after the poor year and bought into the S&P might be second guessing that decision now.

A lot of investors get caught up in what is happening in the market over the last minute, day, month, or year.  It is important to keep the long term perspective and stay diversified no matter how hard it is to not drop out of sectors that are under performing in the short term.

by Jimmy Hancock

References

1. Matson Money. Investor Jeopardy Powerpoint. Mason, OH: Matson Money, 24 Feb. 2015. PPT.

2. Matson Money. Portfolio MRI. Mason, OH: Matson Money, n.d. PDF.

3. Yahoo Finance. Yahoo!, 11 Mar. 2015. Web. 11 Mar. 2015. 

 

 

 

 

3 Rules of Investing

Investing can be very complicated and confusing, but it also can be very simple.  Today I am going to try to simplify investing by discussing the 3 most important parts of putting together an investment portfolio.

1. Own Equities

Equities is just another word for stocks.  Why is this the first and most important rule?  Stocks have historically out performed fixed income over the long term, and that is including the few crashes we have had.  In fact, that battle is not even close, especially now that fixed income has stayed so low the past few years.  Check out this chart which compares the annual return from 1926-2013 of the S&P 500 (Stocks) with Treasury Bills (Fixed Income).

stocks vs bonds

 

 

 

 

 

 

It is obvious to see the long term advantage of owning stocks in your retirement portfolio.

 

2. Diversify

Diversification in your investment portfolio is measured in part by the number of stocks you are invested in, as well as the different categories and countries those stocks are located in.   For example, if you invest in the S&P 500 Index, you are investing in 500 very large US companies.  You are not really diversified at all if that is all you own in your portfolio.

There are many different categories of stocks to invest in.  There is Micro cap (very small companies), Small Cap, Value, Growth, International.  Our company specifically invests our clients in over 12,000 stocks in all of those categories throughout the world.

The benefit of diversification is to lessen the risk that any one stock or group of stocks will crash, go bankrupt etc.   The standard deviation (volatility) of your portfolio can also be managed through proper diversification.

3. Rebalance

Rebalancing at a simple level is just buying low and selling high.  If your portfolio is 50% in Stocks and 50% in fixed, rebalancing would keep it that way through many different market swings.  If stocks go up faster than fixed, then you need to sell stocks (high) and buy fixed (low), and the other way around if the opposite happens.

Rebalancing most importantly keeps your portfolio at the risk preference that you choose, and especially helps to reduce risk in down markets.   It can also give your return a slight boost over the long term as well.

 

Now that you know the 3 rules of investing, you need an investment coach that understands and implements these rules as well.  If you can keep these 3 rules then your retirement portfolio will be in good shape over the long run.

By Jimmy Hancock

 

Reference

Matson Money. The Market Factor. Digital image. Matsonmoney.com. N.p., 23 July 2014. Web. 4 Nov. 2014. <https://www.matsonmoney.com/>.