Sniffed Links - Recovery

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I don’t know that we have seen the bottom of this bear market yet but January was some recovery. It was the best January in over a quarter century. We certainly aren’t complaining but we also know we aren’t out of the woods yet. Enjoy this week’s posts.

Market Commentary - February 2019

Wines from Virginia are finally ready to drink

How To Invest Your Down Payment If You’re Planning To Buy A House

Avoiding Buyer’s Remorse When Purchasing An Expensive Luxury Vehicle

Market Commentary - February 2019

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Index Funds and Risk

There have been a few things written over the last few weeks about index funds and a potential risk they could pose to markets and on capitalism. These arguments are not against index funds themselves but rather against the rising culture of indexing. Index funds have become an important part of a well rounded portfolio and they now make up about 17% of the total U.S. stock market value compared to 4.5% in 2002. We have mentioned in meetings with clients that this percentage is important to keep an eye on because there are some valid concerns and risks associated if this percentage increases to a much higher amount. Even then, however, I would argue the benefit to the individual investor would far outweigh the various threats.

Since index funds are passive in nature, this can lead to a handful of stocks representing a large percentage of an index. Some argue this could pose a threat to markets because if massive selling starts in a few big stocks, it can quickly accelerate. An actively managed fund can limit exposure to any individual security and minimize potential volatility. While there is some truth to this, the larger threat in my opinion stems from active managers trying to "time" markets and chase performance. During the financial crisis, many fund managers were constantly buying shares of Lehman Brothers & Bear Sterns on the way down with hopes their funds would out pace the indices once the stocks recovered. Well, that never happened and many were severely punished with poor returns. The same thing occurred during the 2011 European crisis with European bank stocks. 

Another argument against index funds is that they lead to asset mis-pricing as money is not flowing to the companies that will make best use of it. Again,there is some truth to this but if fund managers were able to consistently identify the "best" companies, they would be outperforming their respective index, not trailing, and index funds wouldn't be gaining as much traction as they have.

In my opinion, the argument that holds the most weight has to do with corporate governance. The late Jack Bogle (the "father" of indexing) himself, expressed his concerns over this very thing. A greater amount of shareholder voting power is in the hands of a few companies who are large players in index investing. Vanguard, State Street and Blackrock to name a few. This can lead to conflicts of interest when so much voting power is in the hands of a few. Generally it is better to have voting power spread out as that tends to lead to more of an even playing field for all parties involved.

The positives that index funds bring to the average investor are many. For one they tend to be a more tax efficient and cost effective way to invest and the numbers seem to back that up. According to the S&P Dow Jones Indices SPIVA study, over 86 percent of all actively managed U.S. stock funds have underperformed their index during the last 10 years. Even more, 83 percent of actively managed government bond funds underperformed their index. These percentages are staggering. It is nearly impossible to know which actively managed funds will beat their respective index in any given year. Actively managed funds almost always have higher internal expense ratios which is another hurdle they must overcome to match the performance of their respective index.

The bottom line is there is a place for both active and passive investing. Investing always takes on a multitude of risks and those risks can vary but one thing that can be achieved regardless is diversification. Like most issues that relate to the market, I think this will work itself out over time but the benefits from index funds to investors can't be denied and their rise has lead to billions of dollars saved by investors.

Sniffed Links - John Bogle

This week the finance world lost John Bogle. He was the founder of Vanguard and the “creator” of what we now call index investing. He was the most important figure in investing. Most everyday investors have never heard of John Bogle yet his impact is felt by almost every investor. Wall Street told him an index fund wouldn’t work. Wall Street told him low cost investing couldn’t work. He proved Wall Street wrong and all these years later every traditional mutual fund company is rushing to compete with index funds and ETFs. The amount of money he indirectly saved investors is well into the billions (and maybe more).

John C. Bogle, Founder of Vanguard Group, Dies at 89 - WSJ

Warren Buffett Remembers Vanguard Founder John Bogle as a Wall Street Revolutionary

Sniffed Links - Over

Is the Bear market already over? Have we seen the worst? We have to assume that it’s NOT over but when you are investing properly it doesn’t really matter. Our portfolios are positioned the way we want them if the market comes back up or if it goes further down. Investing using facts and evidence means you don’t have to make guesses about getting backing into the markets because it means you never got out in the first place.

Are you in the middle class?

Logging In to Your Bank Account Is Now a $3 Billion Business

Sniffed Links - Well Then

Happy New Year and welcome back to volatility. The market swings continue to be highly volatile so we don’t really see and “end” to it any time soon. Trade war, government shutdown, walls, Apple Stock. The list of concerns go on and on but in the face of these core economic numbers look decent. The big concern this week, however, was Apple and CEO Tim Cook admitting that the trade war with China is really hurting. It is likely we will hear more reports like this from other global companies.

Buckle up folks. Nothing is going to change any time soon.

No links this week.

Market Commentary - January 2019

With 2018 in the books, it's good to take a step back and analyze what transpired. It's safe to say 2018 was one of the more challenging years since the "great recession". While it provided less volatility compared to 2008, navigating equity and bond markets proved challenging because of rising interest rates (less accommodative federal reserve), a looming trade war and the possibility of a slowing global economy. 

As discussed in our October market commentary, diversification has been a drag on portfolio returns as a majority of bond and equity indices underperformed the S&P 500 since March. Since 1928, there have been three occasions where the S&P 500 & 10 year U.S. treasury posted negative returns in the same year. Baring a monumental recovery in the last few trading days of the year, this will be the fourth. This is quite the contrast from what we witnessed in 2017 where equity markets experienced some of the lowest levels of volatility in history.

Amongst the volatility, there were several bright spots in the 4th quarter. Diversification has shown signs of life as emerging market equities and some European markets have outperformed the U.S. A majority of bond sectors posted their best quarterly returns for the year. It's important to remember that it is not only equities  that experience a wide variance of returns; this applies to bonds as well. Each bond sector carries its own risk ranging from credit, duration and entity exposure that significantly impacts their respective annual returns. Years such as 2008, 2011 and 2013 illustrate the large variance of bond returns. Many bonds show their true value in periods of stock market volatility. It takes dedication and discipline to ride out an increase in volatility because it can sometimes take years to see meaningful benefits. When analyzing a portfolio, it is important to look at the total and not focus on an individual holding as a properly diversified portfolio should always have investment with varying degrees of expected return to help mitigate volatility.

Markets never provide an all-clear signal, so investors must understand that volatility is a normal part of investing. We expect much of the same for 2019. This does not imply that markets will end lower, but investors should prepare themselves mentally as many issues are yet to be resolved and volatility tends to increase in periods of uncertainty. Equity markets are a great source of wealth creation, but that wealth can be significantly reduced if one is not diversified and disciplined.

Wishing you a Happy and Healthy New Year!

Sniffed Links - Til Next Year

Last post of the year. Some final market thoughts as we wrap up 2018…

We have been in a “down” market for almost a year now. Remember February? It was almost as bad as October. It may not feel like it but we will look back at this time and be grateful for it. The markets need down periods in order for it to function properly. We think there is a better chance that the market continues to lose some value in the near term. We also think there is a very good chance that in a few years you won’t even remember it.

As for a pending recession? Each day we get closer to the next recession. And, each day we get closer to the next Bull market. Slow downs happen so growth can return.

Madoff’s Victims Are Close to Getting Their $19 Billion Back

Investor confusion about target-date funds is alarming

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The Man in the Arena

Market Commentary - December 2018

As of this writing, the returns for November are nearly flat but volatility continues to be front and center. This comes after an October that was abysmal. Volatility exists for a multitude of reasons but in my opinion two reasons should be given more attention: buying on margin and short selling. To be clear, both have their purposes but the negative consequences can be severe.

One of the most volatile times in market history dates back to the stock market crash of 1929. Numerous things lead to this crash but investors buying on margin was a large one. Margin buying is basically when an investor leverages their current portfolio by borrowing additional funds from the financial institution. Margin is typically capped at 50% of the investors portfolio balance. This allows an investor to potentially increase their return as they have an increase in purchasing power without actually having the money. In return, the bank/broker will charge interest on the borrowed funds. Problems arise when investors receive margin calls due to the declining market. A margin call must be repaid to the bank/firm with cash OR by selling investments in a stated period of time. The issue stems from a bit of greed. As markets rise investors tend to become overconfident and complacent and increase their margin amounts even further. Inevitably when markets roll over, small orderly sell-offs can quickly turn into bigger ones as margin calls are triggered and investors become forced sellers. Current margin debt levels far surpasses levels experienced leading up to the financial crisis. 

A recent example would be cryptocurrencies. Twelve months ago, they seemed invincible. Many crypto investors were using margin to increase their exposure. They assumed it was a sure thing for cryptos like Bitcoin to keep doubling and tripling.In the last twelve months, however, nearly every cryptocurrency has dropped by 75% to 90%! I feel for those who invested at the height of the euphoria and some of the recent selling was attributed to margin calls and many investors were completely wiped out as this was part of the avalanche of selling we just witnessed. The same could be said for tech stocks prior to the 2000 dot-com bubble and bank stocks prior to the financial crisis in 2008. History tends to repeat itself in this way.

Short selling on the other hand, involves the sale of an asset that the seller does not actually own. Basically betting the security's price is going to go down. This strategy becomes profitable when the underlying security's price declines and unprofitable (or disastrous) when the security's price increases. Individual stocks, sectors or asset classes can come under pressure from short sellers which can lead to extreme price fluctuations that may not accurately portray the underlying fundamentals. Many wonder why stocks like Tesla and Amazon are so volatile and part of the answer lies with short sellers. They are both at the top of the list of companies with the largest short positions on a dollar basis. If enough short sellers pile on, there will be violent price swings. To a long term investor, short term price movements, while never fun, shouldn't garner too much attention as the long term outlook is most important. The SEC went as far as temporarily banning short selling during the 2008 financial crisis to "protect the integrity and quality of the securities market and strengthen investor confidence." This statement alone shows the distortion short selling can have on markets over a stated period of time.

While some of the recent volatility we have experienced maybe attributed to margin calls and short sellers, we can also point to the same two things as helping the market sustain it run up for the past several years. 

Sniffed Links - Surge

The market surged on Wednesday because the Fed MIGHT have said something that MIGHT indicate that they MIGHT be rethinking aggressively raising rates. It’s absurd but it is what short term investing looks for. Just the slightest indication of hope (or dread).

Wall Street economists don't believe Powell changed his tune much

Eliminating All Student Debt Isn’t Progressive

Facebook should heed the lessons of internet history - The new Yahoo?

TSP Unveils Plans for Expanding Withdrawal Options

Sniffed Links - Clickbait

We tell clients to avoid financial media headlines because they are often misleading. As an example, below are three links CBS MarketWatch article . To call these clickbait would be an understatement. These three headlines appeared within 3 hours of each other!

The best is the first one. When you actually read what Shiller said he actually went on to explain he sees very little chance of a repeat of 2008 in the housing market.

Even if these predictions are correct most investors should still do nothing. Doing nothing is the hardest thing to do, especially when media outlets are putting out headlines like this mess. They take snippets from people and then use them out of context. But, it worked. I clicked on them and now you probably will too. Just remember, these “experts” know nothing more about what is going to happen than you and I.

Robert Shiller: Housing Market Now Reminds Me of 2006

Godfather of Chart Analysis Says Damage Done to the Stock Market is Much Much Worse Than Anyone is Talking About

Jim Cramer: This Market is Reminiscent of the Worst Crashes I’ve Ever Seen

Market Commentary - November 2018

October is shaping up to be one the most volatile months this decade and questions of "is this the start of a market crash?" are resurfacing. Of course no one knows that answer and while equity markets, specifically US, have not experienced a prolonged sell off in years, there are some encouraging signs amidst this wave of selling pressure.

While 2008 feels like a lifetime ago, it is important to remember what we experienced then vs.what is occurring now. During 2008, the S&P 500 declined 8 out of 12 months vs. 3 so far in 2018 (including October). Five of the monthly declines experienced in 2008 were 5% or greater and we have only experienced three months of similar magnitude since June of 2012. This is not to make light of the current volatility we are experiencing, but more so to put things in perspective. It is true that many global markets have experienced much higher levels of volatility over the years, but that is to be expected at times. 

Historically, the types of drops we are experiencing are normal. Its hard to wrap our heads around this but it is much more "normal" than the type of run up the S&P 500 had over the last several years.

A barometer I look at during periods of extreme volatility are how defensive sectors (i.e. Consumer Staples and Utilities) are performing. The simple logic here is at the end of the day we still need things like toilet paper, toothpaste, shampoo. During tough times consumersstill consume power (utilities). If these sectors experience similar declines, then itcouldbe a sign of more troubling timesahead. In 2008, every sector experienced double digits declines. Most of these were-20%or more. This would be a prime example of panic selling. AsI write thison October 24th,consumer staples and utilities are positive for the month, while sectors such as Materials, Consumer Discretionary, Energy & Technology are down -9% to -13%. This could indicatesome of the selling is systematic, not panic, as investors move from economically sensitive sectors to more defensive ones. The technology sector has soared for 5 straight years which has increased the risk to the underlying markets. Afew tech names (Apple, Microsoft & Amazon) now comprise ~11% of theS&P 500, nearly double of what it was in2016! That is a staggering increase and leads to higher potential volatility as fewer names have a bigger impact on the broad indices. With fears of rising interest rates, tariffs and possible slow down in global earnings on the horizon, this sell-off is not entirely unexpected. It is not realistic to assume that the technology sector would continue to experience double digit annual returns. We have been critical of the Federal Reserve in the past for waiting far too long to raise rates and they are now dealing with it head on. It seems the current Federal Reserve is now boxed in a corner with less options to their disposal. Add the tariff issue and things are ripe for volatility.

The ironic thing is during the first half of 2018, consumer staples and utilities were near the bottom of the pack but are making a strong comeback and utilities are now near the top. I have said in the past and continue to say that orderly market corrections, like what we have experienced so far is healthy and at times needed. When markets go up on a straight line (i.e. 2017) and ignore warning signs along the way, that is worrisome and can lead to a much larger correction. While never fun, and this sell-off could continue, it is important to take a step back and remember this is what markets do. It can test your patience and cause you to worry, which is normal and expected. 

Please don't hesitate to contact us with any questions or concerns, that is what we are here for.

Sniffed Links - Big Drop

Foregoing links this week and giving some thoughts….

Facebook, Amazon, Apple, Netflix, and Google (now Alphabet) felt the brunt of the big drawdown this week. They lost over $175 Billion on Wednesday alone. Let’s think about this for a moment. These are five of the largest, best-performing tech stocks in the world.

Where did the money go? What did people who pulled out of these stocks do with their cash?

They likely moved it to cash to wait.

Wait for what? Wait to get back in. These are the speculators, computer algorithms and the un-disciplined. They looked “smart” on Thursday when the selling continued. They may look smart for weeks to come but you better believe they will be sweating trying to figure out when to get back in.

Who needs that stress? People who make a living day trading. People who need higher than average returns to pay their mortgage. People who are so far off track for retirement they are throwing hail mary passes in the hopes of being able to retire like their neighbor who stuck with a proven strategy.

If you are mostly in index based funds you don’t have this stress. The fund will hold these stocks today, tomorrow and in the months to come. You don’t have to worry that a fund manager or their algorithms are trying to time the buying and selling of these stocks.

This is a little tongue-and-cheek. Of course you care but I hope you get what I am saying. Remember the type of investor you have been and will continue to be. Even if it stresses you out try to remember you’re strategy is meant to eliminate emotion, decrease stress and perform over the long term.

And, if this is the next inevitable market downturn then guess what? You are prepared and that’s all you can do. Take solace in the fact that even though it hasn’t been the norm for a while, market corrections and bear markets are quite normal. Its what makes the whole thing work. If the market didn’t have drawdowns then it couldn’t have run-ups and set all-time highs either.

Sniffed Links - Long Term

We talk a lot lately about how a diversified portfolio is hard to stick with when one single asset class like the S&P 500 seems to be destroying everything else in terms of returns over the past 5 years. The below snapshot is from the first link below. Long term thinking must be used when it comes to diversification.

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Market Commentary - October 2018

In nearly every market commentary we mention how important diversification is to an investment portfolio. In 1952 Harry Markowitz introduced Modern Portfolio Theory which further expanded upon the benefits of diversification. The concept seems straightforward and logical yet time and time again many stray from it. The question is why? Why do investors give up on a strategy that "works".

Diversification shows its true benefit over the long run. The issue is there are periods of time where a single asset class’ performance dominates the others. Sometimes these periods can be several years long. For example, from 2004-2007 Emerging Markets returned an impressive ~132.9%. From 2009 to 2012 REITS (Real Estate Investments Trusts) returned ~84%. And more recently, from 2014-Present, the S&P 500 (Large Cap US Stocks) has returned ~60% (as of this writing).  No other asset classes have come close to this same performance in those periods. This type of outperformance leads many to abandon diversification and overweight their portfolios with asset classes that have experienced the best returns. Many forget the years prior and after as to how significantly these same asset classes underperformed their peers. We do believe one should slightly overweight or underweight certain asset classes based on macro economic factors, but too much can wreck havoc on a portfolio's long term stability. 

Over the past four years, excluding2017, diversification has not treated investors well as Bonds, International, REITS & Emerging Markets have lagged S&P 500 performance. The S&P 500 has shown extreme resiliency at every turn and recently has benefited from corporate tax reformstock buybacks, and a growing U.S. economy. You may be asking yourself, why not just own this asset class as it's comprised of the 500 largest (or most "important") U.S. publicly traded companies and has been rock solid the past six years? The answer lies in the details. Owning solely the S&P 500 or any other asset class for that matter will most likely lead to a positive return over the long run. The challenge is you will have to deal with long stretches of underperformance that are difficult to endure if all of your money is in a declining or underperforming asset class. Take a look from 2004-2010; the S&P 500 was in the middle of the pack or lower for SIX straight years. While it did yield a positive return, it significantly trailed other asset classes. Both stock and bond markets are forward looking mechanisms so looking at past performance generally is not a recipe for success. Most people would look to jump ship into the better performers. This creates a loop that leads to chasing returns and market timing.

While 2018 really hasn't been kind to diversified portfolios, it is important to remember the goal of diversification is not outperformance. Rather, it is to minimize the fluctuations and earn an efficient risk adjusted return. There are periods in the short term where diversification may not seem effective, but the long-term results speak for themselves. The key to diversification is sticking to it over time and this will challenge you at times. A properly diversified asset allocation portfolio that is rebalanced regularly aims to smooth out the bumps and place your portfolio in the middle to upper middle of the pack most years.

Sniffed Links - Higher

The Fed raised rates again this week. It got lost in the media shuffle with the political coverage this week. Rates continue to climb up. The 10 year is above 3% again and the markets didn’t collapse so that is a win.

Marijuana stocks were in the news the past couple of weeks. These volatile stocks are the new bitcoin it seems. Speculators (not investors) are using the volatility to try and make a quick return. Don’t be fooled. You can’t out time the pros on this one.

When Pot Smoke Clears, Profits May Be in Familiar Hands

The Great Recession’s uneven recovery

Strap on the Fitbit: John Hancock to sell only interactive life insurance | Reuters

Sniffed Links - Zero

Fidelity launched a zero fee index fund last month and turned the financial media on its head. Not because it was unexpected but because it wasn’t expected this soon. I assumed it would be either Vanguard or iShares to do it first. Fidelity figures it will make money from people using their other funds to more than offset the “cost” of the free funds. It is yet to be seen how this may affect their higher fee managed funds.

This is yet another win for investors. There could be a time in the not to distant future where the only fee investors pay is to their financial planners. It will be transparent and fully understood and the days of selling and commissions will be over. All “advisors” will be fiduciaries and fee-only. Humbly we can say we were ahead of this curve.

My View On: The FIRE Movement - Pragmatic Capitalism

Elon Musk On Joe Rogan

Are target-date funds the answer?

Italian crisis may make Greece’s look benign by comparison