Stock Market Recap after the First Quarter

From what you heard on news you might think the stock market had a horrible first quarter.  With 3 individual trading days that had very large drops, that seemed to be the big news in the stock market.  But in reality the market didn’t really do too bad in the first quarter.  The following is an excerpt from the Matson Money quarterly statement.

“The 1st quarter of 2018 saw a reversal in course in broad equity markets, with both domestic and international equities declining. U.S. stocks fell by 0.76% as represented by the S&P 500 index, while international stocks also weakened, with the MSCI World Ex-USA Index declining 2.04% for the quarter. In unusual fashion, fixed income also finished mostly negative over the quarter. As a result of increasing interest rates, the Bloomberg Barclays U.S. Intermediate Government/Credit Bond Index lost 0.98%.

In the previous quarterly letter, we mentioned how the S&P 500 Index was on a run of 14 consecutive positive quarters. It was noted that although this can give investors a euphoric feeling, it can be dangerous because it can lure them into believing that volatility and downside risk are no longer a reality in equity investing. Stephen King has a succinct yet profound quote in the book The Colorado Kid that states “Sooner or later, everything old is new again”

This quote is applicable in many disciplines, but can be especially useful when applied to investing. When returns are negative, it can feel like they will never turn around. Conversely, in times where returns have been positive for an extended period, it can feel like they’ll go up forever. But inevitably, downward volatility will return to the market, and periods of negative returns will show up again. This is what we have experienced over this past quarter, downward volatility returned, equity returns turned negative. What was old is new again.

Why is this an important concept to remember? Because so many investors react on emotion to what is occurring in the present moment, which can undermine their long-term investing success as a result. Each year Dalbar Inc. puts out a comprehensive study titled “2018 QAIB Report” which looks at the individual investor return of all mutual fund investors in the U.S. In this study, they show that the average equity fund investor only received an annualized average return of 5.29% over the 20-year period ending 12/2017, compared to 7.20% for the S&P 500 Index. One of the main contributors to their underperformance is the fact that the average investor had a retention rate of only 4.03 years. What this means is that every 4 years they decided to change the course of their current investment strategy and go in a different direction.

One can surmise that many of these investment changes result from an emotional reaction to the current market conditions. While the difference between 7.20% and 5.29% may not seem that large, over that 20-year period, the average investor would have received over $120,000 LESS than the S&P 500 on a $100,000 initial investment.

We know the historically these cycles of volatility come and go, and that bear markets follow bull markets and vice versa. But over long periods of time, if an investor remained disciplined and consistent with their investment philosophy, they could have been rewarded with generous market returns. The ability to ignore the noise and keep a long-term focus is an extremely important component for an investor, and as the Dalbar data reveals, can also be extremely difficult.

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

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 15 Apr. 2018. MS.

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.





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.