“When should I get back into the market?”
Yeah… I don’t really get that question. Clients, we think two main things set apart you. My take in this week’s video.
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market timing
What Do I Do with All These Retirement Accounts? Some IRA Strategies and Tactics
There is no law against having more than one retirement account. But it is possible to take this too far—and get yourself a headache down the road. Instead, we’d like to suggest some IRA strategies and tactics that may help.
One person we know is dealing with Required Minimum Distributions (or RMDs) on four accounts in different institutions. Another, recently widowed, is faced with seven sets of IRA beneficiary claim forms in order to consolidate things. And many others have to struggle to understand the overall situation because information about different accounts comes in different forms at different times.
We help by consolidating smaller accounts in various locations into a larger, central account where total values are reported each month and are available online any time. RMDs, beneficiary claims, and other administrative tasks only need to be handled one time instead of many times.
There may be an edge, too, in having an intentional investment strategy that guides all tactical decisions, based on sound principles. In our diversified portfolios, we are able to select the precise source of funds when needed from among dozens of holdings. And we know which options are at the top of our list whenever new money becomes available to invest.
We believe this is a superior approach than just putting money in or taking it out of “the market,” although we can offer no guarantees.
And none of this is to mention that the quality of our advice and perspective might be improved when we’re able to understand all the pieces of the puzzle.
At the end of the day, organizing our abundance is a pretty wonderful problem to have. Wealth seems to be more useful when we understand its meaning, what it can do for us in our real lives. So if you would like to visit about this or anything else, please email us or call.
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Play the audio version of this post below:
What Do I Do With All These Retirement Accounts? Some IRA Strategies and Tactics – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
Re(balancing) Act
We’ve got something that may sound like a riddle at first, but this situation captures an idea that we apply here in the shop.
Suppose you took some of your money and split it equally between two stocks, both trading at $20 per share.
Let’s say that after a year or two, one of the stocks rose to $30 while the other fell to $10.
Another year or two later, they leveled out again, and both stocks were back at $20. But your investment has not been a wash. How?
It might appear that your holdings are right back where you started. There is, however, a simple portfolio management strategy that can help us take advantage of back-and-forth movements.
Imagine if you had rebalanced your holdings in the two stocks when one went to $30 and the other went to $10. If you had sold off a third of your $30 stock and put the cash toward the $10 stock, you would wind up having twice as much of the cheap stock as you did of the expensive stock—and bringing both positions back to the dollar amount they were when you originally bought in.
But now when the high-flying stock gives up its gains, you already took some out, so now the price decrease affects a smaller portion of your portfolio than if you’d held onto all the shares. Similarly, when the depressed stock recovers, you get to enjoy the ride up with more shares than you took on the ride down.
Using rebalancing, this situation would leave you sitting on a net profit of one-third of your original investment—even though both stocks are back at the same price they were when you first bought them!
Rebalancing works because it applies the simplest investing axiom: “buy low, sell high.” When you rebalance your portfolio, you are selling a little bit of the higher-priced stuff in order to buy a bit more of the lower-priced stuff.
Trying to “time the market” is a fool’s errand; rebalancing takes the guesswork out and turns it into a matter of arithmetic.
As always, there are no guarantees: in the above scenario, if the cheap stock kept going down from $10 to $5 and the expensive stock went from $30 to $60, you would look awfully silly (… although not as silly if you had sold out of the one entirely!).
Stocks do not go up forever or down forever: We generally expect a lot of back and forth. By taking on the risk of missing out if there ever is an extended period without back and forth, we have a chance to use the back and forth to our advantage.
Clients, when you have any questions about what this means for you, please call or write.
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.
Investing includes risks, including fluctuating prices and loss of principal.
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Schrödinger’s Market
Quantum physicist Erwin Schrödinger once came up with a thought experiment to illustrate a difficult conceptual problem. Suppose you have an opaque box with a cat inside. In the box is a mechanism that is designed to release a poison gas based on the random actions of subatomic particles on a quantum level.
Now according to quantum theory, it is literally impossible to know what these particles will do in advance. You cannot even accurately measure what they are currently doing beyond general probabilities. In fact, until you observe them they act as though they are doing multiple mutually exclusive things—including behaving as though they are two places at once!
Hence Schrödinger’s box. Without observing the contents of the box you have no way of knowing if quantum action triggered the poison or not. Thus, until you open the box and look the cat is simultaneously alive and dead: a surprising conclusion, and a difficult paradox for physicists!
You and I can leave that problem to the scientists, but Schrödinger’s box can be a useful metaphor for other unknowable states. The actions of financial markets are theoretically not as complicated as quantum mechanics. But predicting market action is so far beyond our current mathematical understanding that they might as well be.
Like quantum particles, the value of a market cannot accurately be measured without interacting with it. This leads to a great deal of uncertainty and can sometimes make it feel like multiple conflicting realities are true at once.
Reading the financial press you will often be presented with competing headlines declaring that we are simultaneously in the midst of a great bull market and a terrible bear market.
As with the box, we prefer to leave these paradoxes to people with more time on their hands. Instead of trying to time the market, we believe in sticking to timeless principles like avoiding stampedes and finding bargains in the hopes of finding quality companies. We cannot predict what market prices will do from moment to moment, but we can guess at general probabilities.
Clients, if you would like to talk about this or anything else, please email us or call.
Teaching an Old Stock New Tricks
Consolidated Edison Company of New York (Con Ed) was listed on the New York Stock Exchange back in 1824. Known then as New York Gas Light, it holds the record for the longest listing on the exchange.
For every single day of those nearly two centuries, every share of its stock was owned by somebody. Through financial panics, recessions, wars, the Depression – through everything – every share of its stock was owned by someone.
It seems curious to us that some investment advisors advocate the belief that the vast majority of investors are incapable of owning shares of stock through the inevitable downturns. (Stocks do go up and down, as we often note.) Yet somebody has to own every share, every day.
These advisors with low expectations of you usually rely on one of two basic approaches.
1. Keep 40 to 60% of your long term assets in bonds or other forms of fixed income. This strikes us as an exceptionally poor idea for many long term investors, because of historically low interest rates, and potential losses from inflation and rising interest rates.
2. Expect to be able to sell out before big declines, and reinvest before big rises. This unlikely outcome is usually sold as a “tactical” strategy. It is a great one, too, but only on paper. Nobody to our knowledge has ever demonstrated a sustainable long term ability to reduce risk while maintaining market returns with in and out trading.
Our experience tells us that many people understand long term investing, and living with the inevitable ups and downs. Many more can be trained to become effective investors. We think you can handle the truth: real investments go up and down.
The thought of forfeiting a significant fraction of potential future wealth by pandering to fear of short-term volatility hits us wrong. We won’t do it here at 228 Main, nor would we pretend we our crystal ball works well enough for in and out trading.
Of course, our approach is not right for everyone. Clients must be able to live with their chosen approach, and not everyone can live with ours. We can handle the 60/40 or 40/60 mix for clients who want less volatility. But the fraction in the market is going to experience market volatility, a pre-requisite to obtaining market returns.
We mean no disrespect to advisors with different approaches. After all, they lack the main advantage we enjoy: working with the best clients in the whole world.
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. All performance referenced is historical and is no guarantee of future results.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The Three Investment Strategies
Great thinker Morgan Housel recently wrote that there are only three legal investment strategies.
1. Be smarter than others.
2. Be luckier than others.
3. Be more patient than others.
Does one of these jump out at you as being a lot more accessible than the others?
Luck falls where it may. We do not control the luck we have. Smarts? We do what we can to improve our odds. Reading, studying, analyzing, thinking…we do our best to understand what we can. But there will probably always be somebody smarter, somewhere.
The edge that anyone may choose is patience. We talk endlessly about the long view, about waiting out the downturns, about hanging in there when times seem rough. Anyone may choose patience, but it is not always easy!
After decades, we have yet to see a fool-proof indicator that will tell you which way the market is going to go in the short run. Nor have we seen evidence that any person can reliably predict the direction of the market. But we do know a couple key things:
• In the past, the broad market has tended to go up about three years out of four, and down about one year out of four.1
• Over extended periods, these ups and downs have potential gains for those who are patient.
Past performance is no guarantee of future returns, of course, so it takes some courage to exercise patience. We appreciate that in you.
Clients, if you would like to talk about this or anything else, please email us or call.
Notes & References
1. Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved November 26th, 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.
Security Selection Doesn’t Matter—or Does It?
One of the staples of conventional investing wisdom is asset allocation—the choosing of broad market sectors, determines investment outcomes. Supposedly, the selection of individual securities within each sector barely matters.
We will explain where the flaw is after a little history. The theory dates back to 1986 when the Financial Analysts Journal published a paper, ‘Determinants of Portfolio Performance.’ The authors concluded that asset allocation explained 93.6% of the variation in portfolio quarterly returns.
Since then, others have concluded that as much as 100% of returns are explained by asset allocation, that security selection doesn’t matter at all.
This version of reality is convenient for some financial planners, who are thereby relieved of the work of actually researching securities and managing portfolios based on that research. If it doesn’t matter what you own, only the category, you simply need to choose your pie chart of sectors and buy stuff to fill it up!
Here is the flaw: all securities are owned all the time, by someone. If you look at the aggregate of all investors (or many investors), security selection appears not to matter. But the individual does not own all securities – and the specific selection of what he or she does own has a huge impact on outcomes.
Investor A buys a security for $100, sells it later for $25 to Investor B. Investor B holds it while it recovers to $100. One has a 75% loss, the other a 300% gain. Security selection matters. In the aggregate, the security started at $100 and ended at $100. But that leaves out the loss for one and the gain for another.
One of Warren Buffett’s earliest investors put $15,000 in, back in the 1950s. Today his name is on the home of the symphony orchestra in Omaha, a beautiful performing arts facility he donated to the community. Security selection matters.
We offer no guarantees about the outcome of our work. But we believe the selection of individual securities is the biggest factor in those outcomes. If you would like to discuss this topic or anything else at greater length, 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.
Investing involves risk, including possible loss of principal.
Asset allocation does not ensure a profit or protect against a loss.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Sell That Dog!
Sometimes the world changes, we notice, and take action in your portfolios. An attractive opportunity may arise, or some issue may develop with a holding we already own. This is the story of a problem that developed, and how we handled it.
For several years we had owned shares in a certain class of telephone companies. Smaller landline carriers, generally serving less-populous areas, offered very high dividend yields. We believed there was a gap between perception and reality from which we could profit.
You see, everyone knew that landlines were in decline as consumers switched to cell phones only. This trend was particularly pronounced among younger households. But we knew that consumer landlines were a small part of the revenues of these companies. Most of the business came from data lines for businesses and high-speed internet access for consumers.
We were happy to own the shares and collect the dividends, believing that growth in the growing parts of the companies might offset shrinkage in the shrinking parts.
An amazing thing happened in 2016. For the first time ever, the number of homes connected by wire to the internet declined. People began to rely more on their smart phones and pad-type devices to connect. Some no longer needed or wanted a computer connected to the internet anymore. This was not what we expected.
We realized the ramifications for our holdings: the part of the business that was supposed to be growing was now shrinking! If revenues declined, dividend cuts would not be far behind. There seemed to be no chance for these companies to preserve value for shareowners.
Fortunately we had been cutting back these holdings for some time to make room for opportunities in high yield bonds. But we concluded that we had better divest the rest. We got rid of the rest of the holdings in all discretionary accounts in a single day of trading.
As we reviewed market sectors recently, we could not help but notice that the two former main telephone holdings were down year to date by more than 35%. Thank goodness we sold out.
Clients, nobody is perfect. The markets have a way of humbling everyone. We do think we improve our chances with wide-ranging research, study and thought. If you would like to discuss these ideas or any other pertinent topic, 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 payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
A 10% Correction is Coming!
There is an amazing thing about the performance of the stock market this year. Looking at the S&P 500 Stock Index, it has hardly dipped more than a few percent from its peaks. There has been a little wiggling, but far less than usual.
We human beings have a remarkable capacity to get used to current conditions, and expect them to persist. This could make trouble for us when the 10% market correction does eventually come around.
Long time clients know we believe that these market drops can neither be predicted nor traded profitably. Many of you call when the market does drop, seeking to invest in any bargains that appeared. We know how this works!
(Of course, we do not own ‘the market.’ Our holdings—and your account balances—sometimes deviate from the direction of the market. In 2016 we were fond of the difference. 2017 so far, the market is a little ahead of us. The point is, the market wiggles up and down, and our performance relative to the market also moves around.)
Commentator Morgan Housel recently wrote “every past market crash looks like an opportunity, but every future market crash looks like a risk.” Our experience after the 2007-2009 downturn demonstrated the first part of that statement. It is the next market crash that we must be concerned with.
Our research process is focused on finding bargains. We’ve taken steps in many portfolios to dampen volatility by changing holdings. Cash levels are generally higher, too. But none of these things will eliminate the temporary fluctuations that are an integral and necessary part of long term investing.
The market will decline. Our portfolios will decline. These declines will seem like a risk when we are going through them; we may see later that they really were an opportunity. The relative calm we’ve experience recently will give way to more volatile times—we know this, and should not be surprised by it.
We’re working to be in position to profit from opportunities that arise. Clients, if you would like to discuss your situation in greater detail, 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. All indices are unmanaged and may not be invested into directly.
Investing involves risk, including possible loss of principal.
Sell in May and Go Away?
One popular piece of market lore revolves around the idea that virtually all of the stock market’s cumulative gains over large chunks of the past have come between November and May. The other half of the year, from May to November, has produced little in the way of gains, on average. Hence the saying, “sell in May and go away.”
There are three challenges facing anyone who seeks to act on this supposed wisdom. The first one is, any widely expected event gets discounted by the market as it gains currency with the public. If the saying works, it will get overexposed until it stops working.
The second challenge is, the statistics on which the lore rests are averages—they say nothing about what happens in any particular year, much less about what will happen this year.
The third challenge is the most interesting of all. When one examines the results of not selling in May and never going away, one wonders what more could be desired. I (Mark Leibman) was born in May 1956, when the S&P 500 Index stood at 44. As I write this, the index is 54 times higher. This calculation of a 5,300% profit excludes dividends, which would have added considerably. This tells us how not selling in May would have worked over the past nearly sixty years.
Our purpose in writing is to help you avoid being tricked by the “Sell in May” idea into a short-sighted investment decision. There are always reasons to worry about the future, developments which alarm people, and fear mongers peddling pessimism for profit. Against the dynamism and ingenuity inherent in human endeavors, these fears and worries have yet to produce a permanent downturn in the economy or the market.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
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