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.

 

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.

What Those Gold Advertisements Aren’t Telling You

We have all heard the advertisements on the radio and headlines that keep telling us that investors need to flee to safety and buy gold.  They will tell us that the stock market is going to crash worse than last time, and that investors need a hedge to inflation with gold.  They will say it with charisma and inflict fear upon us as investors.  Even I have found myself a little fearful at times.

I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.  Gold as an investment may give some assurance to the leery, older investor, but the numbers just don’t add up like you might think they do.

Show me the Data

The reason gold is not good as a long term investment is because the growth of the price is extremely low compared with stocks.   Check out this paragraph from article I found.

“Because of inflation, a dollar acquired in 1802 would have been worth just 5.2 cents at the end of 2011. A dollar put into Treasury bills at the same time would have grown to $282, or to $1,632 had it gone into long-term bonds. Held in gold, it would have grown to $4.50. True, that’s a gain even with inflation taken into account. But the same dollar put into a basket of stocks reflecting the broad market would have grown to an astounding $706,199.” 1

1 single dollar grows to almost a million dollars in stocks, but in gold it grows to $4.50.   That stat alone teaches us not only the weak gold price growth, but the extreme growth potential in stocks.

So what about more recently?  Let’s look at Gold’s return over the last 25  years

Over the last 25 years the real return(inflation adjusted) of gold was a measly 1.5%, and 4.1% before inflation adjustment.  2. Stocks as indicated by the S&P 500 over the last 25 years had a return of 9.62%. 3.  That is over 5.5% per year increase compared to gold.  Yes, that includes 2008 stock market crash.  If you understand the value of compounding, you know you can’t afford Gold’s return in a long term portfolio.

The current price of an ounce of Gold is $1281.80.  This is a far cry from where it was just a few years ago when it reached its peak above $1900 in 2011. 4.  If you jumped on that bandwagon, you have hopefully learned a valuable lesson.

Gold as a hedge against inflation

A lot of people that invest in Gold do it knowing about the low long term returns.  The reason they give is it is a hedge against inflation.   I understand this side and its merits, but have 2 minor push backs to that.  First of all, how can you compare the inflation rate, a very constant thing year after year, to the price of gold, which bounces around on extremes year to year.   Second of all, how are stocks not a better hedge against inflation?  If the CPI goes up due to inflation, stock prices also increase.  We saw that with the huge growth rate of stocks back in the 80’s when inflation was very high.

One Case for Gold

The only reason I would ever advise someone to buy gold, is if they believe that a catastrophic, life altering event is coming in the very near future.  If you think we are going to go back to hunters and gatherers and that capitalism will disappear, then I suggest you buy gold.

Final Say

Past performance is no guarantee of future results, but in my opinion gold is not a good hedge against inflation, and it is not a good long term investment.  Investing in Gold is better than keeping all of your money under your mattress, but this is a good, better, best argument. If you are scared of stocks it is most likely because you or someone you know has gone about investing in stocks completely wrong in the past.   To win financially for retirement, invest in a globally diversified portfolio filled with stocks and short term fixed income.

-By Jimmy Hancock



References

1. “Investing in Gold: Does It Stack Up? – Knowledge@Wharton.” KnowledgeWharton Investing in Gold Does It Stack Up Comments. Wharton School of the University of Pennsylvania, 22 May 2013. Web. 15 Apr. 2014. <https://knowledge.wharton.upenn.edu/article/investing-in-gold-does-it-stack-up/>.

2. Carlson, Ben. “A History of Gold Returns – A Wealth of Common Sense.” A Wealth of Common Sense. N.p., 21 July 2015. Web. 18 Aug. 2015. <http://awealthofcommonsense.com/a-history-of-gold-returns/>.

3. “S&P 500.” Wikipedia. Wikimedia Foundation, n.d. Web. 18 Aug. 2015. <https://en.wikipedia.org/wiki/S%26P_500>.

4. “Yahoo Finance – Business Finance, Stock Market, Quotes, News.” Yahoo Finance. N.p., 5 Jun. 2017. Web. 5 Jun. 2017. <http://finance.yahoo.com/>.

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.

“Billionaires Bet Big on Market Crash”

I go online to check Yahoo Finance everyday to see how the stock market and other markets are doing.  I try to stick to the numbers and real information, and avoid the headlines and articles most of the time.  But, a few weeks ago this was the headline that couldn’t be missed.

Billionaires Bet Big on Market Crash (The Reason Why Is Shocking)

I was in the mood to be “shocked” so I clicked on the link and it took me to the article.   This is where it gets comical.

This is the first paragraph…

“Investment titans are making massive billion-dollar bets that the stock market is approaching an imminent crash…Multibillionaire Carl Icahn, for example, recently increased his short positions by 600% … betting as much as $4,321,000,000 that the stock market will plummet sharply and suddenly!  Mysteriously, just about every major financial whale is taking specific steps against the market … all at the same time.” 2.

The amount of money Carl Icahn is betting just so happens to be numbers counting down to 0, which i thought was a funny (on purpose) coincidence.  But obviously what is happening is they are trying to get me to think that stock market genius’s all see this great crash ahead, so it must be happening.

It Gets Better…

“The glaring question is … what’s coming that has them so sure? The best answer we found is linked back to a little-known, controversial calendar.  Devised by a group of Wall Street analysts in 1905 and kept closely by insiders, this little-known calendar has accurately predicted every boom and bust for the last 111 years, and what it says for the rest of 2016 is alarming.  “It simply labels each year with a corresponding letter. For example, 2008 was a ‘K’ year, meaning ‘low stock prices.’ Hence, I was forewarned of the crash.”  In the video, one can see that 2016 ends as a “D” year … once again meaning “low stock prices.”2.

Wow, this kind of reminds me of the Mayan calendar that predicted the end of the world in 2012.  I am pretty sure the stock market is more complex than a single letter label can define for any given year.  How in the world, would some guys in 1905 know anything about the stock market in 2016.  So the weird thing is, I am pretty sure this article was written at the beginning of 2016, but by the time I saw it 2016 was almost over.  Now it is 2017 and we know for sure that nothing alarming happened in the stock market in 2016.  In fact, just the opposite, lot’s of positive returns.    It was at this point of the article that i started thinking, why would anyone write this article and put so much fear into investors.  Then I read this.

With this kind of information at hand, it’s easy to see why those in the know are making big bets that a stock market crash is imminent. But what’s even more exciting for investors is what 2017 and 2018 hold. Yastine believes that if one has the help of his updated and advanced version of the calendar, they could add an extra $1.2 million to their retirement.  Click here to see the calendar in JL’s new video exposé. 2. 

Wow, that is a great sales pitch.   They are in the business of making money off of peoples fear and greed.  The more fear they can put into the investors, the more money and fame they will get.

I advise you to stay away from the fortune tellers of Wall Street.  Nobody has a crystal ball.  Don’t fall for the headlines that are only there to sell you on emotion of fear.  Fear is a powerful emotion that can take over an investors mind.  Don’t let it.

By Jimmy Hancock

References

1. Mayan Calendar. Digital image. Creatingdigitalhistory.wikidot.com. N.p., n.d. Web. 4 Jan. 2017.

2. Smith, Jocelynn. “Billionaires Bet Big on Market Crash (The Reason Why Is Shocking).” The Sovereign Investor. The Sovereign Society, 8 Dec. 2016. Web. 8 Dec. 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.





The Peter Lynch’s of the Investing World

peter-lynchBack in the glory days of the 90’s when every investment guru or guru wannabe had, as Andy Warhol duly noted, their 15 minutes of fame, we had our share of these gentlemen and ladies. Lately I’ve been reminded of some of these 15 minute wonders and I thought that a reminder of them might prove useful to investors of today who either have never heard of them or whose memories of them has faded.

So, whatever happened to…?

One in particular that I remember was Peter Lynch, the legendary(?) manager of the Fidelity Magellan fund. A question that I always seemed to be asked in those days was: “how do you explain Peter Lynch.” The esteemed Mr. Lynch it seems had managed with his fund to have surpassed the S&P 500 in ten of the preceding eleven years. A very nice record indeed. I had a very simple reply: “he was lucky.” Now that’s not sour grapes. The record is what it is and it speaks for itself. However, when one looks at the landscape of mutual funds in those days, statistically there should have been three funds that were able to deliver that record. In other words, given the number of funds out there at the beginning of the measured period, one would have expected three to have achieved this result. Moreover, if it were really skill that was involved, then Lynch, after he left Magellan should have been able to continue delivering superior results (his best timing move ever because he left at the top and subsequent managers using the same strategy were never able to deliver similar results thereafter). The historical reality was that he left the fund and became an editor of Worth Magazine where he provided his monthly stock picks — none of which were ever able to perform as his picks had in the past. Fleeting fame and glory!

Moreover, chasing his performance proved to be a futile endeavor. The reality was that at the start of his run (wouldn’t you liked to have been there for the full ride?) there were only a little over 7,000 investors. When he left, they numbered in the hundreds of thousands. Very few — particularly those who remained after he left — actually earned the record returns he had made. A not uncommon phenomenon among investors.

Another shooting star — one that I remember from a PBS news program about what was going on during the dot com/technology bubble — while it was going on so that it actually helped to promote the expansion of the bubble — was one Garret Von Waggoner. This gentleman was the true guru of the technology boom. My goodness, he grew 291% in 1999. Who wouldn’t have wanted to hitch their wagon to his star? A $10,000 investment in 1997 would have grown to $45,000 by March of 2000. Of course, very few were there at the start and most came on board later during his run. So how did investors do?

They lost 21% in 2000; almost 60% in 2001 and 65% in 2002. That $45,000 amassed by 2000 would have dwindled to $3,300 by the end of September 2002. By 2010, his fund, was now named the Embarcadaro Absolute Return Fund and any investor who had the stomach to hang on for the full thirteen year ride would be sitting with just $1,900 to show for both their patience and his supposed skill! Yet, he was touted as the second coming of Peter Lynch at the time.

Another “Legendary Investor” that comes to mind is Bill Miller. He gained, as the press described it, “rock star status” running his fund for Legg-Mason. The fund beat the S&P for fifteen consecutive years from 1991 (take that Peter Lynch). Morningstar named him not only a manager of the year, but manager of the decade.

Subsequently, in later years and in particular 2007 – 2008, his fund fell 55% when the S&P fell 37%. He had bought into housing stocks and financials at exactly the wrong time! He then stepped down from the fund. Subsequently he made a comeback with a different Legg-Mason fund in 2012 & 2013. The fund’s performance has suffered since then. Morningstar’s “manager of the decade” was now the recipient of only one star (their lowest rating). This year, so far, the fund is down 8.5% versus a gain of 7.88% for the S&P 500. A spokesperson now advises: “The fund had a significant struggle this year… The market got concerned about economic weakness and we saw a massive selloff in cyclical stocks.” Well, duh, what happened to the revered prescience of this “rock star?” Miller, of course, providing the reason for the article, has stepped down.

What can one glean from all of this? Beware of shooting stars — they often flame out with negative consequences for those who hitch their wagons to them. Beware of hubris whether belonging to one of these “stars” or in your own character. The stars and events eventually will line up against them and you and they and you will learn humility — likely in a most financially painful way!

References

  1. Taylor, Fred. “Commentary, September 6, 2016: Shooting Stars and How Fleeting Is Fame.” Message to the author. 6 Sept. 2016. E-mail.
  2. Peter Lynch. Digital image. Gurusblog.com. N.p., n.d. Web. 20 Sept. 2016.

Market Timing: Winners and Losers

Idaho Falls roth IRA Wall Street wins and investors lose every time market timing is done.  So what is market timing and are you losing returns because your money manager is doing it?  Or even worse, have you been caught doing it all on your own?

According to Investopedia, market timing is “The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. ” 1.

If you have ever watched any of the financial channels on TV, or been on a financial website like Yahoo Finance, they are constantly promoting Market Timing.   Every day I check Yahoo Finance there is some new trend that somebody has predicted in the market.  One day they say, this bull market is just getting started.   Then the next day they say, indicators say that market is in for a huge downturn.   Which one should we believe, or would our retirement portfolio be better off if we just avoided the market timers opinion?

Academics and Research

Listen to what Investopedia has to say further about market timing…

“Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion. ” 1. 

I am going to go with the academics on this one.   I have the data to prove that market timing does not work.

CATEGORY 1986-2015 Annualized Return
S&P 500 Index 10.35%
Average Investor – Stock Fund 3.66%
CPI (representing Inflation) 2.60%

*2.

As we see here in this little chart, if an investor would have just been invested in the S&P 500 for the last 30 years they would have gotten over an 10% return.   But what did the average stock fund investor get?   3.66%.  That is just over inflation.

Why?

So why did the average equity investor lose almost 7% annual growth in their portfolio?  A part of that is due to costs, but the vast majority is because of market timing.  Investors seem to almost always be wrong when it comes to deciding when to be in the market and when to take their money out.

Lets take 2008-2009 as an example.   The end of 2008 the market is taking a nose dive and what does everyone tell you to do.  Get out of the market.  So you take your money out because of the fear that it will never come back.  Ultimately you are selling low.  Then on March 9, 2009 the bottom finally hits and the market begins to take huge jumps upwards.  But you are not invested so you get none of that growth.  When you decided to get back in you were buying high.  The market today is reaching new highs and is way past where it was before the crash in 2008.

The most simple thing to say in investing is buy low and sell high.  Obviously it is not that simple to actually do.  Market timing is detrimental to your long term retirement goals.

– By Jimmy Hancock
References

1.”Market Timing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 16 June 2014. <http://www.investopedia.com/terms/m/markettiming.asp>.

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

3. Ticking Time Bomb. Digital image. Ipkitten.blogspot.com. N.p., n.d. Web. 29 Aug. 2016.