Sniffed Links - Comparisons

Trade War, threats made, market declines, blah blah blah. A lot was written this week. A lot of what was written was also written a few months back. And a few months before that. On and on we go.

Clients and prospects seem to like to know where they stand in relation to “others”. Below is Fidelity’s most recent retirement study. One stat of note is that average 401k balances have more than doubled since 2009. This is great news. The bad news? The average account is about $100k. Still, that’s WAY better than the 2009 number of about $50k.

Fidelity Retirement Study

Bond-Proxies Peaking Our Interest

Sniffed Links - Bounce

We received some surprising economic news last week as the first quarter was stronger than expected. I think this had a lot to do with the market bounce back. The economy followed with a bounce back of its own. Of course, like most data over the past 10 years there are different ways to view it. Some are positive and some are negative. Economists Assemble!

Why US economic growth isn't as strong as it looks

15 Months of Fresh Hell Inside Facebook

Mapping the US Gastronomic Borders

Digital Minimalism: How to Simplify Your Online Life

Market Commentary - May 2019

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What About Bonds

While much of the spotlight has been on the breathtaking rally in equities, what has transpired in the bond market might be more impressive. Both are off to their best starts in a decade. The rally in equity markets has probably benefited from the massive spike in stock buybacks. US corporations were large beneficiaries from the tax cut and jobs act and on pace to buy back more shares than the record breaking amount in 2018. Bonds have benefited from the Federal Reserve signaling it would hold back on rate hikes for the foreseeable future. 

Of course this is all in stark contrast to the way 2018 ended. Similarly most of the headlines in the fourth quarter focused equities and their sharp decline. But, several bond classes were in the midst of one of the largest quarterly declines since 2008! 

It is likely the Federal Reserve and central banks helped put a floor on markets in the short term. The underlying issues of a slowing global economy coupled with rising deficits still exists and needs to be addressed in the coming years. Currently global debt sits at $244 trillion, which is three times the size of the global economy. Estimates are for this to increase over the next year. If rates are left low, corporations and governments will continue to borrow and the debt pile will swell. But, if interest rates rise, there could be difficulty servicing the debt which could lead the global economy to come to a screeching halt. Again, however, it is important to point out that economies and markets often go in different directions so these sort of concerns are more for tracking and watching and less for taking action.

Sniffed Links - Filtering

Sticking to my discussion from a few weeks back, I want to further explain how I consume “news”. I think clients probably assume that as financial planners and investment advisors we stay on top of “breaking news”. This is somewhat true. We stay on top of the headlines so we know what clients may be reading or hearing. But, a financial advisor who reads “breaking news” is likely ineffective in terms of their ability to stick with a plan. Breaking news can make you feel like you have to do something as a reaction to everything you read. The way we invest (and the way we think every long term investor should invest) doesn’t lend itself to needing to know breaking news related to the economy or markets. Sure, we know what’s going on but we don’t sit around waiting to react. Instead, we study long term trends, philosophies, and strategies. These are more important to keep up with.

Summary of Upcoming TSP Withdrawal Changes

The Day the Dinosaurs Died

Active Fund Managers Get Blown Up Again After Hot Start to 2019

The $800,000 Card

The best apps to block robocalls on cellphones

Market Commentary - April 2019

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Stock Picking

This month's commentary is a continuation from my post in February. Every so often you may hear people in the industry talk about how it's a "stock pickers market" or about a firm that just launched a fund based on its "best investment ideas". We always ask ourselves, "why are now and based on what data?" Stock picking is not what it once was. The rapidly free flow of all information has turned stock picking from a skill to a game of risk and gambling. The reality is many stocks underperform the broad market. Since 1973, only 22% of rolling 10 year periods were the number of stocks that outperformed the S&P 500 at 50% or higher. Unless someone is lucky enough to consistently picks winners their performance will lag the benchmark. Not to mentioned likelyhigher total fees.

Let's look at some other data and statistics provided by VanguardJ.P. Morgan.

  • Since 1980, ~40% of all stocks have suffered a permanent 70%+ decline from their peak value in the Russell 3000 Index. This percentage spikes when looking at technology, biotech & metals/mining stocks.

  • Since 1980, 320+ companies have been removed from the S&P 500.

  • Two-thirds of all stocks underperformed vs. the Russell 3000 Index, and for 40% of all stocks, their absolute returns were negative.

  • From 1987 to 2017, ~47% of stocks were unprofitable investments and ~30% lost more than half their value. On the other hand, roughly 7% of stocks had cumulative returns over 1,000%.

Pretty eye opening stuff which makes me wonder why so many try to "beat" the market when the odds aren't in your favor from a risk/reward basis. There will always be a small percentage who outperform, but that is the exception, not the norm. If you're picking stocks and don't own the 7%, good luck keeping up with the index. Also, if you miss on the 7%, the tendency is to attempt to close the gap by chasing returns/performance which rarely works.

I get it, many think they can find the "next" Apple or Amazon, and a few will. Even if you were lucky enough to invest in both early on, each have experienced multiple 50% to 75% declines and sticking it through is extremely difficult especially when it's a large percentage of ones portfolio. Not to mention for every Apple and Amazon there have been countless stocks that have wiped out shareholders. We consistently preach the key to investing is managing risk. There are few who can handle multiple 50%+ corrections without reacting. The reality is most investors make portfolio changes based on emotions (greed or fear) and not based on fundamentals. While I understand why this happens, the key is avoiding it. 

Sniffed Links - Reading

My consumption of financial news is “old school”. I get most of it from RSS feeds and some from trusted sources Twitter. To call RSS old school is laughable to those who still read newspapers but considering most people get their news from Facebook or LinkedIn, I am a dinosaur. In the financial industry consuming information is a skill and a process that takes time to develop. There is so much out there and unless you know who to trust and where to go you can get completely lost. That’s why we try to only share what we think is worthy of reading. The best stuff out there are from people who are writing content as a way for them to organize their own thoughts and ideas. The worst stuff out there is from people who are trying to get clicks or to sell newsletter subscriptions. It’s a shame, really.

Recessions: It's Been a While

The Twenty Craziest Investing Facts Ever

Former Fed Chair Janet Yellen: Far from retired, nowhere near done

Sniffed Links - Privacy Piracy

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With technology being such a large part of markets it’s important to keep an eye on the trends in the sector. One that we have mentioned many times is privacy. Just when we thought Facebook couldn’t get more scummy new broke that the number you use for two factor authentication “security” settings is being used in ridiculous ways. What’s scary is I bet Facebook isn’t the only one doing this. It’s disgusting. They keep promising to get better but they are too big to get better

Now Facebook is allowing anyone to look you up using your security phone number

Your friends’ social media posts are making you spend more money, researchers say

Sniffed Links - Cycle

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People are wondering why the market is soaring despite economic headwinds and weak earnings. The simple answer is that this is more common than you may think. Ara will discuss this more in his market commentary. One think economists seem to be able to agree on is that we are nearing the end of a cycle. Of course, they can’t agree on how long the “end” of a cycle can last.

The Heat Grows on Indexing

Spending Happily

Climate Change Could Hit Norwegian, Merck, and These Companies Hardest

Market Commentary - March 2019

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After experiencing one of the worst 10 week declines this decade, markets have followed up with one of the best two months to start a year in history. Yet another example of why marker timers have been crushed so many times since 2008. The average investor is better off neverlistening to market headlines and traditional news outlets. There are always a few touted "geniuses" who call a certain market correction but over the long run a majority of these market prognosticators are wrong far more often than right. I'm not picking on them as they are being paid to make predictions. No wants to write a story about investment managers who don't take wild guesses as to the next downturn.

I will be the first to acknowledge that the global economy is facing several headwinds and the economic data isn't getting any better. In early January we received earnings warnings ranging from Apple, Intel, Constellation Brands & FedEx to name a few. But investors who sold because of this have watched stock markets rallyfor six consecutive weeks. And volatility has all but ceased for the time being. Sometimes the only thing that makes sense about markets is the fact that they don't always make sense.

How could markets rally nearly double digits on the back of weaker earnings? Some are calling this quarter an "earnings recession" yet the market keeps climbing. The fact is this is not uncommon. Surprisingly, since the 1930s a majority of times when earnings were down, stocks actually ended the year higher. This is a head scratcher for many but the truth is the markets and the economy don't always go hand in hand. Markets are shaped by many variables and corporate earnings growth is just one. Data points such as inflation, wages and interest rates play an important role along with politics and central bank intervention. Relying on one as the basis of an investment decision is a fool's game. History seems to back this up.As Ben Carlson points out in his great piece, the 1930s saw earnings growth of -42% while the S&P 500 was nearly flat. The 1950s saw modest earnings growth of 46% but gains in the S&P 500 of nearly 500%! In fact, in 2018 earnings rose by 19.2% yetthe S&P 500 FELLby 4.4%. 

How? 

Trade wars, rising interest rates and a looming government shut down spooked many investors and triggered a massive sell off. Two months later, the sell off has almost been wiped out as the Federal Reserve backed down from their interest rate hike projections of threeor fourrate hikes in 2019 to one or zero! This along with what appears to be some progress in the U.S./China trade talks sparked a breathtaking rally.

Too often investors want to find a silver lining for the basis of why they believe markets should react a certain way when in reality no one knows with any certainty. Investing isn't easy and when emotions get involved, it becomes even more difficult. Market corrections, bear markets andcrashes are what makes markets work. Without risk of going down there would be no chance of markets going up. While never enjoyable, an investor should accept the fact that over their lifetime they will experience multiple of these and the key is being in a risk adjusted portfolio that will allow you to sleep at night and avoid the cardinal mistakes of selling out of a plan that is working. 

Sniffed Links - Political

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I haven’t shared links in a couple of weeks and I may be doing so more sporadically because its very hard to find anything worth reading that isn’t political at the moment. Also, the market seems back to the theme it has followed most of the decade; blind resiliency. Earnings season hasn’t been great. Consumer spending is showing possible signs of slowing. Nothing, however, is able to push the market from its current trajectory. Look, we are not complaining about near double digit returns in 6 weeks but we also have to be realistic.

I’m ready for Spring.

This Is Your Brain Off Facebook - The New York Times

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

The One Constant in the Stock Market

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