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The Long View

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The unemployment rate dropped to 3.5%, a fifty-year low, according to the Labor Department’s report for September. Like clockwork, some observers were quick to find the clouds around this silver lining.

That got us to thinking about life fifty years ago compared to today. Looking at the facts, it is hard to think of it as anything but unimaginable progress. In 1970, more than three quarters of homes lacked air conditioning. Televisions were only in 61% of them. 38% had washing machines. One in twenty lacked indoor
plumbing. There was about one land line telephone for every two people.

More startling are the things that nobody had in 1970, because they had not yet been invented. Mobile phones, digital cameras, post-it notes, email, video games, inkjet printers, MRI scanners, fiber optics, personal computers, GPS, and the internet, to name a few of them.

Median household income, adjusted for inflation, grew 37% over that half century. The rich got richer, but the average household made a lot of progress, too.

However, life isn’t all puppy dogs and rainbows, as an older acquaintance of mine likes to say. The economy grew and shrank in its cycle of expansions and recessions. The stock market, measured by its major averages, also went up and down year to year, sometimes sharply.

In between the record low unemployment rates at the beginning and end of the fifty years, we had three episodes of unemployment in excess of 10%.

We have noticed that when times are bad, some have difficulty imaging a recovery. And when times are good, some can scarcely think about the possibility of poor times returning. We humans like to believe that present trends and conditions will persist, good or bad.

The bad news is, the economy and the markets will continue to go up and down. The good news is, over the long term we have made amazing progress on almost every front. The past is no guarantee of the future, of course. In our opinion, there are many reasons to believe our progress will continue.

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


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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.

Letters To Our Children #8: Keep Your Eye on the Horizon

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We wrote before about your three investment buckets, each with a different time horizon. Here is why that is so crucial.

Business founder Jeff Bezos highlighted the key thing about time horizons.
“If everything you do needs to work on a three-year time horizon, then you are competing with a lot of people. But if you’re willing to invest on a seven-year time horizon, you are now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue.”

The investment parallel is clear: just by lengthening the time horizon, you can live with the short term volatility that is inherent in the pursuit of long term investment results.

Those with a short time horizon—an insistence that market values be stable day to day or month to month—can generally expect meager returns. Stable values and liquidity both cost a premium, and if you want both you’re not left with much room for returns. This is good for your short-term bucket, but may hamper you anywhere else.

Behavioral economists have a theory that the preference for stability is very strong, part of human nature. If the demand for stability is high, then the price of stability may be high—and the rewards for enduring volatility may prove to be large since fewer are willing to do it. This is based on our opinion, no guarantees!

Bottom line: we believe in investing for the long term with your long term money, and leaving short term strategies to your short term bucket. It pays to understand volatility, and its role in your investment returns. No matter what, you should be able to live with your chosen strategy, even when (especially when?) it is uncomfortable.

Clients, if you have questions about this or anything else, please email us or call.


Content in this material is for general information only and 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.

Making Sense of the Data Flood

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In the 21st century, information seems to be a thousand times more abundant than we could have dreamed of just a few decades ago. An insight into the olden days may be the best way to illustrate this.

When I first became qualified to work with investment securities, I would maintain a list of topics to research. It might be a specific company or an investment product, or some aspect of the economy. Day by day, new items would go on the list.

Every other week, I spent a morning in the library. Stock reports from S&P Marketscope and ValueLine were available there, in large binders. The financial newspapers and other reference works were available, too. I would chew through the items on my list all morning, then make telephone calls that afternoon and evening to report my findings.

No internet, no email, no cell phones.

Now, of course, we interact with economists and research analysts and portfolio managers in real time via webinars, Twitter, and conference calls. Research on thousands of companies is at our fingertips. Data and analysis subscriptions supplement the expert resources made available by LPL Financial and our other institutional partners.

Instead of writing research topics down in a notebook to be studied in the library days later, we often can respond to client inquiries almost instantly, and always quickly.

The key element in our approach is not the flood of information available. By itself, that flood would drown anybody. Instead, it is in the experience and knowledge we bring, in order to understand the narratives and themes lurking in the data. Context and perspective is vital.

When you have read thousands of pages of research, annual reports, and SEC filings, you develop an understanding of what is pertinent, and what may be disregarded. Greg Leibman, in his ninth year here, does a lot of the heavy lifting.

We are fortunate to be alive in this day and age, able to take advantage of the opportunities to operate more effectively on your behalf. Clients, if you would like to talk about this or anything else, please email us or call.

Connect the Dots

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Do you remember the “connect the dots” pictures for children? By drawing lines from one dot to the next, the players discover that a coherent picture emerges from a seemingly disorganized collection of dots on the page.

Likewise, our work involves creating a picture that makes sense out of all the things going on in the world. In our version, though, there’s no handy numbering guide to draw our attention to the relevant dots.

Instead there seems to be an infinite number of dots in the world. So our first task is to do some sorting. For example, a vast mass of information is available about the day-to-day movement of the stock market. We can sort out any dots that fit into the category “the market goes up and down”—and then discard them. They are not pertinent for long-term investors.

Time horizon plays a large role in sorting as well. There is a wealth of opinions about nearly any investment alternative. A short-term technical analyst may have an opinion that is useful to a day trader but worthless to investors who are thinking in terms of years or decades.

But our work involves more than sorting out what to ignore. We frequently need to dig deeper—to read SEC filings, to research what happened in prior cycles years ago, and to look up many years of operating results. In other words, we still have to be able to find some of the specific dots we know are needed to complete the picture.

For example, we believe that inflation in the next few years will exceed consensus expectations. There is little information from the past decade supporting this view, in our opinion, but as we dig deeper, the patterns going back many decades suggest we may have it right. (No guarantees.)

Another way of saying all of this is that perspective, context, and background matter as we try to connect the dots. We are fortunate to have time to think deeply—and clients who value our methods and our work are a big plus. Together, we’ll create the picture.

Clients, if you would like to talk about this or anything else on your agenda, 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.

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.

Little Is Big

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We were working recently with a client whose spouse passed away last year. Major life changes usually require a series of conversations to get everything settled and all the adjustments made.

This conversation showed us that “little is big.” The household cash flow was just a bit shy of covering the bills. Savings on hand were slowly being eaten up, month by month. If you have been in this position, you know it feels bad. It affects your attitude in a negative way.

A simple adjustment, slightly increasing the monthly withdrawal from invested balances, fixes it so there will be a little money left over every month instead of a constant shortage. The amount isn’t material to the sustainability of her finances. It was little, but changed everything. Little is big.

The same notion applies to other things in other ways, including investment analysis. Imagine the dynamics of an industry whose business is steadily shrinking by 1% per year, compared to one that is growing by that much. The shrinking industry would tend to have too much supply, poor margins, and dispirited employees. A slight difference—a little growth instead of a little shrinkage, would change everything. Little is big.

It matters in retirement planning, too. We did some arithmetic for a client age 40 with a $180,000 retirement account balance and $9,000 per year in deposits. A 1% difference in annual returns, the difference between 7% and 8%, makes a $400,000 difference in the amount accumulated at age 65. Little is big. (This is arithmetic, not a projection nor a prediction. No guarantees.)

This raises a question: if every little thing is potentially big, how do you keep track of it all?

For us, the answer is to keep the big idea in mind, and try to make sure everything we do advances the big idea. Our big idea is to grow your bucket, and strive to make it serve you as you need. Paying attention to the little things working to advance the big idea, that we can do.

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.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

 

Two Ideas About Time

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Two ideas about time affect our plans and planning when it comes to investing. There is conflict between these ideas, so we need to examine them more closely.

The concept of compounding wealth over time is alluring and powerful. Something that doubles every eight years would be sixteen times the money in thirty-two years!

What does thirty-two years mean in the context of planning for a lifetime? It is the distance between age 30 and when people begin to retire. Of two people at age 60, one of them might reasonably expect to be alive thirty-two years later. You may think that thirty-two years sounds like a very, very long time. But 62 year olds will tell you that age 30 seems like yesterday. Thirty-two years clearly is a pertinent time frame for life planning.

This is key because long time horizons are generally tied to long term investment results.

The other idea about time rests in one of the ultimate truths of our existence. We may think about the past, or plan for the future, but where we live each second is RIGHT HERE, RIGHT NOW! The survival of the human species in earlier ages probably required us to be vigilant of potential threats and lurking dangers at all times. There was nothing to be gained by thinking about tomorrow if a lion was going to eat you today.

So human nature has a bias toward focusing on the present. This manifests itself in unhelpful ways in modern society. We tend to think that current trends or conditions will persist—even when they are unsustainable. Some of us seem to believe there will always be time later to take care of longer-term priorities or goals. We have trouble picturing future changes.

The focus on the present also may explain why so many lack the context and background that history can provide. We have heard people say “This has never happened before” about many things that are a recurring feature of our history. By not understanding challenges overcome in the past, today’s problems may trigger an unwarranted sense of danger.

The focus on the present is in conflict with the idea of compounding wealth over time. Our role is to try to make sure that people have what they need for the present, have a cushion for emergencies, and keep a long term focus for their long term investments.

In other words, balance is key. Call or write if you would like to talk about the balance in your plans and planning.


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