time horizon

Icky-Tasting Medicine

© Can Stock Photo / dolgachov

If you believe that living with ups and downs is an integral feature of long term investing, some aspects of customary investment practices seem rather curious.

The idea that volatility is risk is the root of the trouble, in our view. We believe volatility is simply the normal ups and downs, not a good measure of risk. A widely followed concept, Modern Portfolio Theory or MPT, adopts the approach that volatility is literally, mathematically, risk.

This approach attempts to work out “risk tolerance,” by which they mean willingness to endure volatility. If one is averse to volatility, then portfolios are designed with volatility reduction in mind.

Unfortunately, volatility reduction may result in performance reduction. But investments which do not fluctuate are not truly investments. Your bank account does not fluctuate, but it is not an investment.

We think beginning the conversation with an attempt to tease out willingness to endure volatility is a lot like a doctor working with a child to determine tolerance for icky-tasting medicine before making a prescription.

Our strategy is to impart what we believe about investing. We work with people to understand what part of their wealth might be invested for the long term, and whether they are comfortable with ups and downs on that fraction of it.

This necessarily involves learning about near and intermediate cash needs and income requirements, as well as talking about what it takes to live with the ups and downs. We invest a lot of time and energy into providing context and perspective so people might be better able to invest effectively. This process begins at the very beginning of our discussions with potential clients.

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


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

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

Up And Down Really Means Up And Down

© Can Stock Photo / webking

As long term investors we talk a lot about the need to weather short-term volatility in pursuit of long-term results. Our notion is that volatility is not risk, but an inherent feature of investing.

As years go by, many think of the market as having good years and bad years. This is based on the outcome for calendar years. The astonishing thing is how much movement there is during the course of the typical year.

“At least one year in four, roughly, the market declines.” We’ve said that about a billion times, to reiterate that our accounts are likely to also have good years and bad years, if one judges on annual returns. The object is to make a decent return over the whole course of the economic cycle, year by year and decade by decade.

But in those other three years out of four, the market also experiences declines during the course of the year. In an average year you may see a decline of 10 to 15% at some point during the year.

Our object is to leave long term money to work through the ups and downs, without selling out at a bad time. Three things help us do that:

1. A sense that everything will work out eventually, a mindset of optimism.

2. Awareness that downturns tend to be temporary, ultimately yielding to long term growth in the economy.

3. Knowing where our needed cash will come from, based on a sound cash flow plan.

Bottom line, even years that end up well can give us a rough ride. Knowing this can make it easier to deal with.

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.

Stock investing involves risk including loss of principal.

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.

 

Did Fleetwood Mac Get It Wrong?

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The iconic Fleetwood Mac hit song, Don’t Stop Thinking About Tomorrow, encourages us to believe tomorrow will soon be here, better than before. The focus is always supposed to be on tomorrow.

But if we never stop thinking about tomorrow, we cannot live in the moment, appreciate what we have right now, and fully experience the sights and sounds and feelings of today.

Experts estimate we have 15 billion neurons outside of the brain, most with multiple nerve endings. If you are fully preoccupied with the 85 billion neurons in your head, thinking about tomorrow, you are not feeling the sun on your face, the wind in your hair, the smell of sweet clover, or whatever else may be going on right now. Are you truly living?

As with so many things, perhaps the best answer is in between. Not all of one, not all of the other, but down the middle. When we think about tomorrow, we improve life for our future selves. Planning pays off—that is why we show up for work every day.

But what is it for, if we do not truly live? Living in the moment, feeling life in all its joy and pain is what it means to be human. You may know of someone who pointed so hard toward retirement, worrying and saving every possible dime, that they never could begin to enjoy the present, even after that glorious tomorrow arrived. Tragic.

Our object is not to insult the wonderful classic rock tunes that some of us enjoy—but to promote the idea of balance. We need to think about tomorrow, plan and live an intentional life in some respects. At the same time, we will be happier and healthier, better centered and more well-grounded, if we also stay present in the moment.

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

The Rip Van Winkle Effect

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Rip Van Winkle is a character in a Washington Irving short story written nearly two centuries ago. You might know the story: Rip sleeps for twenty years up in the mountains, eventually returning home to find that much had changed.

One of the most dynamic companies in the world emerged on the scene a little over twenty years ago. An investor who purchased it on its first day of trading would have made several hundred times his original investment, had they held all the way through.

In spite of the incredible long-term result, it would have been very difficult to achieve even if one had bought in early. If you carefully looked every day to see how it was doing, as of November 12th this is what you would have experienced:

• On 1,346 of the days of ownership, the value would have been less than 50% of its previous peak. This is nearly one day in four, out of the 5,410 trading days in question1.
• On 494 of the days, the value would have been down 80% from the prior peak.
• The worst drop from a prior peak would have been 94%.

It isn’t always easy to hold an investment that has declined in value. We strive to own bargains, even when they become better bargains. (Once upon a time, a client asked me “What kind of moron would watch a stock go down from $11 to $7, dropping day after day, and do nothing?” Of course, I am that kind of moron.)

We have noticed that a certain few of our clients use the Rip Van Winkle effect, to their benefit. In the example above, they would have accepted in advance they would be under water at times, and just held for the long term. They enjoy the long-term result, without the day to day anguish of fluctuating values—they did not need to look every day.

We work diligently to understand what we should own, and why. Sometimes we change our opinion and sell at a loss. But often the Rip Van Winkle effect would help us. Clients, if you would like to talk about this or anything else, please call.

Notes & References

1. Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved November 12th, 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.

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.

Stock investing involves risk including loss of principal.

The Three Investment Strategies

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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.

Choose Your Risks Wisely

© Can Stock Photo / alphaspirit

When you think about your finances over the course of a lifetime, it is easier to see that risks may only be selected, not avoided.

Our first understanding of risk often relates to fluctuations in value. If you put in a dollar, and the value soon drops to 80 cents or 60 cents, it seems like a clear (and vivid!) loss.

Money buried in a can would never have that kind of risk, yet its purchasing power—what you could buy with it—declines year by year if there is any inflation at all. This kind of damage reminds us of termites, which chew away behind the scenes, causing damage that is not obvious.

Longer term fixed income investments, like bonds, offer interest that may offset inflation in whole or in part. But the value of a bond may change with interest rates. A 3% bond is probably not going to be worth its face amount in a 6% world.

The interesting thing about all these different kinds of risks is that they cannot be entirely avoided, but they may be balanced against each other.

• The things that fluctuate in value may provide growth over the long term to offset inflation.
• Having money in hand when needed may enable us to live with fluctuating values in other parts of our holdings.
• Reliable income helps us avoid excess amounts of money laying around.

We think one of the most valuable lessons about risk is that, on our long term investments, volatility is not risk. If we aren’t retiring for many years, ups and downs in our retirement accounts may not be all that pertinent.

The stock market, measured by either the Dow Jones Average or the S&P 500 Index, has risen three years out of four. There is no guarantee that this general pattern continues, or how results will work out over future periods. But someone that invested ten, twenty or forty years ago may have seen a lot of growth overall, in spite of fluctuations ever year—and some years that were negative.

Clients, if you would like to talk about the balance of risks in your situation 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.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

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.

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.

 

Pain Fades Away

© Can Stock Photo / pressmaster

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.

Building a Retirement Fund: Two Simple Things

© Can Stock Photo / tashka

As a rookie in business, I impressed myself with how much knowledge the work required. It was complicated! It did not take long to figure out that many people believe the same thing about their work.

The point was driven home when I made the mistake of suggesting that working in the ice cream factory must be pretty simple—to a fellow who worked on the production line. “Are you kidding me? You got all your different flavors, plus the ones with nuts or candy mixed in… it’s complicated!”

Like any field of endeavor, retirement planning has those who seek to impress with how complicated it is. But if you get just two simple things right, you can put yourself on the road to progress.

Your Savings Rate. The money you put away is the raw material of your future retirement. The first thing is to set aside money every payday. 401(k) plans make it easy, but you can do it with or without one. It seems like many people starting out cannot save 10% or 15% of their earnings—one needs to buy groceries and electricity, too.

But wherever you start, even at 1% or 4%, you can increase that 1% per year until you get to 15%. Or put half of any raise into the plan—if you get a 4% raise, add 2% to your contribution rate.

Your Long Term Strategy. Put your long term money into long term investments. Various investments offer short term stability or long term returns—but not all of both. If your retirement is decades away, investments that promise a stable value tomorrow or next year do nothing for you in your real life. You might aim for higher returns instead.

(Some people are unable to live with the ups and downs of long term investing. We aren’t suggesting that living with volatility is right for everyone. But if you require stability, you will probably need to save more in order to reach your goals.)

Clients, if you figured these things out long ago, you might pass this along to younger folks. To talk about these ideas or anything else, 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 investing involves risk including loss of principal. No strategy assures success or protects against loss.

 

Playing the Long Game

© Can Stock Photo / JamieWilson

The more we think about it, the more striking it is. We are talking about the connections between major decisions and strategies in other parts of life, and effective investing.

Lengthening your time horizon enables you to look past normal market ups and downs, and perhaps enjoy long term gains. On the other hand, a short-term focus leaves people with a choice of potentially safer but stagnant accounts, or day-trading. Our experience leads us to believe that playing the long game pays. No guarantees, of course.

Likewise, thinking about where you want to be seven or fourteen or twenty-one years from now gives you a framework that shapes the choices you make day to day. You may be more likely to make progress toward your major goals in life. Not playing the long game may hurt your chances.

Many have had the experience of enjoying some product or service that seemed to be priced at unbelievable bargain levels. When we were young, a wonderful barbecue ribs place opened up nearby. Great food, all you could eat, an unbelievable price. There was nothing else like it. Customers flocked to it—we went back again and again.

For a few months, that is. Until it closed without notice or warning. The proprietor had not been thinking about the long game. He knew it was important to deliver a great experience to large numbers of customers. But he wasn’t paying attention to the need to cover his overhead and make a decent return. A dining room full of happy customers, the short term indicator, was not enough.

As customers, we would have been better off to pay sustainable prices to keep the restauranteur in business. His place might have become one of those beloved institutions that last generations. Instead, we got bargains on good food for a few months—then it was over.

In our business, we often counsel people about investments or insurance they originally purchased from an agent or advisor prior to becoming our client. Often some level of confusion or frustration has crept into their understanding of what they have. We are always happy help clear things up.

But this is an object lesson to us about the importance of being there for you. We are always thinking about the long game for our enterprise, too. 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.