Is a Drop a Loss?

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We humans use stories about events great and small to help understand the world. One of the common stories about the stock market contributes to a great misunderstanding, however.

A market decline from some higher point in the past is often spoken of as a loss. Yet whenever the market is trading at an all-time high, every past downturn has been fully recovered. One might ask where the loss actually is.

To illustrate, the decade of the 1990’s was a good one for the broad stock market, as measured by the S&P 500 Stock Index. It more than tripled, rising from 353 points to 1,469. Yet of the 2,527 trading days of the decade, 1,171 saw a decline—a drop—in the market index.1

Those down days represent a cumulative 729% in “losses.”1

In a decade when the market tripled, how does it make sense to speak of losses during the interim? Particularly losses equal to many times the beginning level?

The market is volatile. Values fluctuate. It goes up and down. But if you have long term goals, it might pay to focus on long term results, not temporary downturns. If you invest next week’s grocery money in the stock market, then yes, a temporary downturn will result in a loss when you sell out in order to buy food. Otherwise, we would say a drop is not a loss.

Note: one should never invest next week’s grocery money in the stock market.

Our business is striving for long term results for people who share our time horizon and philosophy of investing. We talk about it every way we know how, in many venues, to reinforce effective investing attitudes and to forewarn those who lack them.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved September 18th, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

 

The Right Stuff

© Can Stock Photo / LiaKoltyrina

Tom Wolfe’s 1979 book chronicled the elite test pilots from whose ranks the first astronauts were chosen. The title The Right Stuff referred to the combination of mental and physical characteristics required for their work.

According to author Charles Duhigg, the same words apply to people who have reached high levels of effectiveness in business. People who become much more productive do not necessarily get more done—they get the right stuff done. Thinking deeply about the work enables them to focus on the most important elements.

At 228 Main Street, we began focusing a long time ago on our three most important activities. Talking with you to collaborate on your plans and planning is at the heart of our work. Investment research and portfolio management are the other most valuable activities. These are the things that make the most difference—they are the right stuff for us.

We figured out that we needed to develop a staff to take care of the important details of service. Having the right beneficiaries, getting money out to you when needed, preparing the forms and maintaining the files we need simply to be in business—all of these things are vitally important, too.

There are about 10,000 minutes in a week. By focusing our work time on the right stuff, we have a better chance to understand what the right stuff is for you—your most important objectives, your most cherished goals—and help you strive to reach them.

Clients, if you want to talk about your ‘right stuff,’ please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Passion and Indifference

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“Indifference is as important as passion.” Organizational expert and author Robert Sutton (no, not THAT Bob Sutton) included this on his list of 15 things he believes—his core principles.

In recent years, seeing the occasional life and death struggle up close, juggling time constraints and geographical complications, most of the non-essentials have been stripped from life. Time and energy must be focused on the things that really matter.

Health and family are at the top of the list. But business provides the resources for the necessities of health and the niceties that keep life worth living. So 228 Main is really integral to everything else. It is fair to say I am passionate about my work for you.

What makes room for our passions, our priorities, is indifference to many other things. If it has a spark plug in it, chances are good that I am indifferent to it. If it is on television, ditto. Worrying about my appearance? That would have to rise a thousand places to get on the bottom of my list. Yardwork, fine wine, dust, arguing with strangers on the internet, complaining about things beyond my control…we do not have enough space to list the things to which I am indifferent.

Connecting with you, time with family and those I love, attending to health, the economy and markets, striving to grow your buckets, building an effective organization, these are the things that matter to me now. It is an interrelated, integrated life.

We all have interests, preferences, and our own ways to regenerate. But we can’t focus on our passions unless we let go of a lot of things that really don’t make much difference. Wise clients, mastering the art of contented retirement, made this point to me recently. Many things that seemed important enough to worry about years ago don’t even appear on their radar anymore—indifference is the word.

Clients, if you would like to talk about your passions or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Don’t Look Down

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Many of you may remember the classic Warner Brothers roadrunner cartoons. Wile E. Coyote continually schemes to catch the roadrunner only for his plans to backfire. Often he winds up sailing haplessly over the edge of a cliff, hovering in midair. Only once his predicament finally dawns on him does he plummet to the canyon floor below.

Sometimes he falls almost immediately. Other times he may remain hanging in the air, oblivious, for an extended time before gravity kicks in. You know as soon as he goes off the cliff that he is in for a fall. You can probably even figure out what will happen as soon as he puts his plan together. But sometimes his physics-defying act winds up dragging things out.

The market, much like the cartoon coyote, does not obey the laws of physics. Sometimes it seems obvious that something may be due for a big market move. A company may seem like it is absolutely set to take off, or due for a fall. But no matter how obvious it seems that a price is unsustainably high (or low), the market can stubbornly defy gravity for a long time before reality finally sets in.

Sometimes a prediction may pan out quickly. Sometimes they may pan out later, or not at all. We have enough experience to come to terms with this and take the long view. We do not believe in trying to time the market: we cannot claim to know what will happen in the market, and we certainly cannot claim to know exactly when.

We think we may be able to make a pretty good guess about what will happen—eventually. But we would rather stick to our core investment principles than try to predict the immediate actions of a market that sometimes seems to have more in common with slapstick cartoons than the real world.

Clients, if you have any questions or concerns, please email or give us a call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Pain Fades Away

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Some pundits calculate the current run-up in the stock market as the longest bull market in history. It seems many have forgotten how tumultuous and uncertain things have felt at times during the rise.

Before the rise began, a punishing drop in the market (and investment account balances) happened, from mid-2007 to spring 2009.

Then, just a couple years into the recovery, we had one of the most turbulent periods ever. In August 2011, after dropping more than 5% the week before, the Dow Jones Average dropped another 5% on Monday, August 8. This 634-point drop was partially offset by a sharp rebound on Tuesday, a 429-point gain. Wednesday reversed again, with a drop of 519 points. Thursday’s gain of 423 points ended a string of daily moves greater than 400 points, down-up-down-up.1

Since the market was much lower then, an equivalent 4% move today would be about 1,000 Dow points! Imagine that four days in a row. We lived through it.

Why did this happen? Developments developed, happenings happened, and pundits spewed punditry. It would spoil our story to detail the details. As it turns out, they don’t matter.

We’ve been asking people whether they remember this episode. Few do. Thus our conclusion: the pain is temporary.

If you do a little math with our story, you’ll note the Dow dropped more than 10% in six days1. This was alarming to those who were paying close attention. Yet from the longer-term perspective, it probably would have been a mistake to sell at any point in there.

After all, this turmoil happened during the longest bull market in history!

The next round of turmoil is always out there. When we counsel patience, it is with the long term—and a knowledge of history—in mind. Clients, if you would like to talk about this or anything else, please email us or call.

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed September 4th, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Rebalancing or Reframing?

© Can Stock Photo / Juliedeshaies

“Rebalancing” is said by some to be a wonderful portfolio practice, as it restores a predetermined ratio of stocks to bonds. But this consensus wisdom has a cost that is seldom mentioned.

Over very long periods, some kinds of assets have outperformed others. So on the whole, rebalancing over extended periods has tended to remove funds from potential higher-return sectors and placed them in lower-return sectors.

The aim of rebalancing is to reduce volatility. It is generally successful at that. But bottom line, rebalancing may deliver lower volatility to long-term investors at the cost of lower returns.

The only problem with volatility is that people may react to it and behave less than optimally—selling out at a low point, for example. But rebalancing is not the only way to deal with this issue.

Behavior can be changed by reframing. Long-term investors can be persuaded to consider the original starting point (the contributed capital) as the anchor for comparison to current values. Gains in the faster growing side of the portfolio can then be viewed as “house money,” so to speak. After some gains are amassed, then volatility does not need to be viewed as a loss of capital. Selling out at low points may be less likely.

Problems arise when investors define a “loss” as the peak value ever attained less whatever lower value may occur later. By that logic, people could claim that they have lost money most of the time, even while they’ve grown a fortune. It makes no sense to us. Most of the time, markets and stocks are trading lower than some prior peak—they never set a new high every day.

By reframing gains and losses to the cumulative result since inception—instead of over some shorter period—one might substitute reframing for rebalancing and could end up with more wealth. No guarantees, of course.

Clients, this is one of the reasons we talk about long time horizons, patience, and living with volatility. If you would like to talk about these things or any others, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Portfolio Hiccups

© Can Stock Photo / NicoletaIonescu

We have all had the experience of getting interrupted by a hiccup. Do they serve any useful purpose? A momentary dislocation, each spasm passes quickly.

Over the course of our lives as investors, we similarly experience a spasm through our portfolios from time to time. We feel this way about the year so far. Unlike hiccups, which sometimes feel like they come out of nowhere, in this case we can clearly spot some of the causes:

• Your portfolios are generally overweight in select natural resource holdings, a sector that may do better or worse than the major market averages in the short run. So far this year? They haven’t been great.

• We began adding overseas equity exposure a while back, as we saw better bargains emerging after a decade of underperformance. These bargains have become even better bargains, which is another way of saying they haven’t been great either.

• In recent years, cyclical holdings have found a home in our shop. Many of these have been affected by trade war talk and tariffs.

At the start of the year, we were focused on the years and decades ahead, as always. We prefer up years to down years, of course. But the best time frame for effective investing is one measured over many years. That is why we see this year so far as a hiccup—in the grand scheme of things, a momentary dislocation that will pass.

Paradoxically, those things that hold us back in the short run are often the things that provide above-average results in following periods. It has happened before; it will happen again. We counsel patience with our current holdings.

Clients, if you would like to talk about this or anything else, please email us, or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

 

There’s One Born Every Minute

© Can Stock Photo / stokkete

Here at 228 Main Street, we pride ourselves on having an elite clientele. Other advisors may brag about having richer or more famous clients. We prefer to enjoy having the wisest group of clients we could ask for.

Some financial types might see this as a drawback. If you are trying to trick someone into a sale, you want them as gullible as they come. But we are in this business for the long haul. If we resorted to tricking people, how long would they stick around? Even if we managed to string them along, they would only hang around until the next slick pitch.

We would rather find people who understand what we are about. It is simpler. The added benefit? It is easier to face ourselves in the mirror.

We are not in the business of selling to suckers. Radical transparency about who we are and what we do is the best way to make sure we are all on the same page. We do not believe in using manipulative sales tactics.

We do not sugarcoat our risks. Our investment philosophy carries risks. If you want safety and stability, you can open up a savings account at the bank. That is not what we are here for, and we will not pretend otherwise.

We do not promise returns. We have winning streaks and losing streaks. We hope to make the winning streaks outweigh the losing streaks. We are proud of the work we have done, but we make no guarantees.

We do not pretend to be a charity. We are not in business as a favor to you. When we buy groceries from our friend the grocer, he is providing us a service; when we do our work for you, we strive to do the same. But he does not do it out of the goodness of his heart, and neither do we.

Some of the pitches we have heard are so transparently phony it would be insulting to your intelligence if we were to use them on you.

We believe you are a member of a very select group. Clients, if you would like to discuss any aspect of your business, please call or email us.


 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Haunted Houses, Haunted Markets

© Can Stock Photo / AlienCat

As Halloween approaches every year, haunted houses sprout across the land. Their purpose is to surprise and scare you, to provoke fear and screams and chills. Sights and sounds and sensations are all used to create the illusion of horror and danger. People pay money for the experience.

We were reminded of this recently, listening to promotors of a canned sales pitch that began, “With all the uncertainty in the market…” The peddler’s aim was to create a sense of fear and danger about long term investing. The pitch seems cynical, since it is alleged to be appropriate in all market conditions.

People who succumb to scare tactics pay for the experience, too. The costs may be in foregone gains resulting from stagnant investments, or higher expenses from products that purport to provide stability.

A member of the best group of clients in the world (our opinion) told us recently about her response when another financial type promoted the fear of market uncertainty to her. “What market uncertainty? There is certainty in the market. It is certain to go up and down.”

Accepting volatility as an integral part of long term investing has been quite liberating for this person. She has been through market cycles, up years and down years, and she knows how it works. She lives a vibrant life in retirement, filled with sports, activities, friends, and travel. Worrying about things that cannot be changed does not fit in to her life.

One of the keys to her comfort is understanding that account balances are not what buys the groceries–cash flow does. Knowing where the cash is coming from allows her to live with the ups and downs of her account value. She keeps track of where she started, so she understands the magnitude of her cumulative gains over the years.

We are not saying that our approach, our philosophy, is right for everyone. If you prefer to believe the markets are scary, you may—it’s a free country. We are talking to our clients here, not debating those who disagree.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Change is Changing

© Can Stock Photo / PerseoMedusa

When we think about our lives, our work, and our leisure, it seems evident that the pace of change is accelerating. This is not a new idea. A 1970 best-selling book by Alvin and Heidi Toffler, Future Shock, first brought this idea into public consciousness—they argued that the rate of change was overwhelming for many people. The future was coming too quickly. And since then, things have only gotten faster.

Thinker Burt White spent time talking about change at the recent LPL Financial national conference. One of the lessons of change is that knowing about it is not good enough, he says: “You have to do something about it.”

We think about the evolution of the economy and the markets, the changing face of law and regulation, industry trends that affect us, and the unfolding needs of you, our clients. There are many sources of change!

Knowing that adaptability is the new superpower, as White says, we also think about how we survive change, or better yet, thrive in it. How do we “do something about it”? The answer, for us, has a number of parts.

• Focusing on your wellbeing helps us sort out what we need to do in seeking to improve your position in the years ahead. You know our theory has long been the better off you are, the better off we will ultimately be. Looking at change through this lens brings clarity about what we need to do.

• Planning to work to age 92 has perhaps given us the perspective of a younger, more vibrant enterprise. When others might be coasting toward retirement, seeking an exit, we are gearing up and planning for the decades ahead.

• Having a sophisticated institutional partner like LPL Financial is a boon. It feels as if they are creating the future of digital communications together with us. They are at the leading edge of new media in terms of support and training, in our opinion. Few colleagues employ these tools to the extent we do, to keep our connection to you.

The unfolding future, change and all, feels as if it were built for us. We like having the same story for everyone. Communicating at the speed of light is good for you and for us. And it is as gratifying as ever to work with you as you strive toward your goals.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.