perspective

The Long View

© Can Stock Photo / iofoto

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.

What Are You Looking At?

© Can Stock Photo / sanayamirza

In planning, we take a look at the world in which we operate. Our plans need to be grounded in reality to have a chance to work out. If I plan to learn to fly by flapping my arms vigorously, the laws of biology and physics are going to have an impact.

When we look at the world, two kinds of things are especially pertinent. Challenges are the obstacles to our success. The stuff in between the challenges are possibilities. The Wright brothers evidently spent no time trying the arm-flapping thing, or fussing about the challenges of physics and biology. Eventually, one of their possibilities was converted into the accomplishment of flight.

The way some people talk about challenges, fighting them or overcoming them seems to be a key element of success. In that line of thinking, challenges occupy a central role.

I have been in a situation where the challenges seemed impossible. In fact, many have failed to overcome the same kind of challenges. Reflecting later on this chapter in life, a surprising realization emerged.

Under the pressures of the situation, I had no time to think about anything but the possibilities. After the initial planning, the challenges turned out to be totally irrelevant.

The realization: when you focus on your possibilities, your challenges disappear.

Thus the question in the title. What are you looking at? Your focus, your perception, these things change the world.

We’ll be thinking about this more. There are applications to other parts of our work for you. In the meantime, if you would like to talk about this or anything else, please email us or call.

World’s Biggest Roller Coaster?

© Can Stock Photo / winnieapple

The biggest roller coaster in the world is Kingda Ka, at Six Flags Great Adventure in New Jersey. Sometimes investing provides a similar experience.

We have written before about the lovely decade of the 1990s, when the major stock market averages more than tripled. When you get up close and really look at what happened, however, it looks a whole lot different. We examined the data for the S&P 500 Stock Index.

During that decade, there were 1,171 trading days when the S&P went down. The total points “lost” on those days adds up to 5,228. Put that in perspective: the decade started at just 353 points! The down days “lost” more than fourteen times the beginning value1.

Who would knowingly stick around if, on the first day of the decade, we knew that 5,228 points would be “lost” on the down days?

There is a reason we put the word “lost” in quotation marks. It might be more appropriate to speak of temporary declines rather than losses. We say this, because of what happened on the other 1,356 trading days in the decade.

On those up days, the market went up a total of 6,344 points—or more than 17 times the beginning value1. If we knew only that piece of the future at the outset, money might have flooded in.

The bottom line is, here is how we got a triple in the market: it went up 17 times its original value, and down 14 times its original value, in totally unpredictable bits and pieces of rallies and corrections. Patient people prospered.

It is hard to argue with a triple. That is a fine result. This is why we talk incessantly about the long term, long time horizons, keeping the faith, following fundamental principles, and not panicking at low points.

During the decade, how many times did 10% corrections have to be endured? 20% bear markets? Were there any 30% or 40% losses? WHO CARES? It didn’t matter to long term investors.

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

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed October 3rd, 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.

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

 

Optional Thinking

© Can Stock Photo / lisafx

Readers know we believe there are those financial arrangements that maintain stability and those that may garner long-term investment returns. But anything that promises both stability and high returns is not likely to work out that way.

The uncomfortable truth is, we must live with volatility in order to have a chance at market returns. Short-term market action cannot be reliably forecast, nor profitably traded, in our opinion.

Yet market values can be volatile. Imagine an account of $500,000: a 20% drop would shrink it to $400,000, while a 20% gain would grow it to $600,000. How do people stand it?

First, long-term clients tend to take the long view. If that $500,000 account started as a $200,000 account years ago, the owners remember where they’ve been. That original investment is their anchor: any value above $200,000 represents a gain from that beginning value. (We are talking about the effects of time and compounding, not claiming any unusual investment results.)

Second, the long view helps clients understand that volatility is not risk. Put another way, as we’ve written before, a short-term drop does not necessarily represent a loss. How should we view that $500,000 value dropping to $400,000, in the long view? Relative to the original $200,000, it’s still a gain. Worrying about drops as if they are losses is optional for people who are investing for many years or decades down the road.

Third, even while staying the course over the long haul is important, strategies need to address short-term needs. For those who are living on their capital, knowing where the cash is going to come from is vitally important. With secure cash flow, it is easier to live with the ups and downs in account values. We call this pursuit of opportunity “owning the orchard for the fruit crop.”

This perspective requires a certain confidence that we will stumble through any problems and likely come out of whatever troubles have arisen. Optimism is sound policy, for if we are going back to the Stone Age, it won’t matter what is in your portfolio anyway.

Clients, if you would like to talk about these ideas or any other, 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.

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.

 

Connect the Dots

© Can Stock Photo / bradcalkins

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.

Two Ideas About Time

© Can Stock Photo / Klementiev

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.