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Lauren's Blog

Lauren’s blog covers topics that impact your finances, your family, and your future. Is there a topic you’d like Lauren to tackle? We’d love your suggestions and feedback.

To stay on track in today’s market, simply take a look at the past

To stay on track in today’s market, simply take a look at the past

So far, October 2018 has been a discomforting reminder of what it means to be an investor. Intellectually, we all know that wise investing requires carefully balancing risk and reward over the long term. Despite having lived through the financial crisis of 2008, the Dot-com crash in early 2000 and, for some, the stock market crash of 1987, it’s been easy to forget about the risk side of the equation in recent years. As “the market” and our portfolios have swelled to unimaginable heights, we’ve come to expect long-term, stable, extreme growth, and we fear any loss of those gains.

Last week, the market dipped into potential correction territory. It’s no wonder that we’ve been getting a few calls and emails from clients who are feeling a new level of stress and anxiety. The two main concerns we’re hearing right now are 1) the stock market keeps going up (so it must crash soon!), and 2) my portfolio is performing much worse than “the market.”  These questions can make any investor feel like they need to do something. The place to begin is by addressing these very emotional concerns. As Benjamin Graham famously wrote 70 years ago in his book The Intelligent Investor:

“The investor’s chief problem—
and even his worst enemy—is likely to be himself.”

As long as you have an investment strategy in place that is designed to meet your goals and your needs, my short answer about what to do is simple: nothing. Here are some facts to help alleviate investors’ two main concerns, no matter what the market does next week, next month, or next year:

  • What if the US stock market crashes?
    A quick look at some facts about your portfolio and the market itself can help put the fear of a looming crash in clear perspective. First, if you’re a client of ours, the percentage of your portfolio in S&P US stocks is somewhere between 9% and 30%. That means that stocks play a balanced role in your portfolio, which is diversified in other assets like bonds, real estate, and international stocks. This diversification is designed to protect you from a US correction. Your allocation is designed to meet your goals through ups and downs, so sticking with that allocation is going to be your best long-term investment strategy.

    Second, no one can time the market. If you try to guess when to get out and back in, the odds are overwhelming that you will guess wrong. For more in this, see my blog post Volatility, escalators, and yo-yos from three years ago in October 2015. (Yes, it is the same old story!)
  • Why isn’t my portfolio keeping up with the stock market?
    No one wants to miss out on big gains. Headlines keep reminding us how great the US stock market is doing. It’s time to address this media-fueled FOMO (fear of missing out!) once and for all.

    Since most clients have less than 25% in S&P stocks, it’s not an apples-to-apples comparison between balanced portfolios and the US stock market. Also, when it comes to your long-term returns, risk matters, and the S&P 500 is about 180% riskier than our balanced portfolios. Lastly, bond prices, which also make up a portion of a balanced portfolio, have decreased this year, but these losses are temporary paper losses. For more depth on this topic, see my blog post Wall Street has gone wild! Is it finally time to change your investment strategy?

This is the perfect time to take a trip down memory lane. I opened the doors to Klein Financial Advisors in 2003, just five years before the financial crisis. This September marked ten years since the failure of Lehman Brothers, which is considered the triggering event of the financial crisis and the great recession. Consider these numbers for some perspective: On October 11, 2007, the S&P 500 Index closed at 1576.09. On March 9, 2009, the S&P 500 Index bottomed out at 676.53. That means that an investor with $1,000,000 in stocks would have seen the value of her investment drop by more than half, to $430,000.

In the weeks, months, and years that followed the crash, I held a lot of clients’ hands and successfully shepherded them through the financial crisis. Fear was rampant, but I assured them that the market would rise again and their portfolios would recover. However, many other advisors did not. Some advisors allowed their judgment to be affected by fear and inexperience. Many investors fired their advisors and went to the sidelines. After the crisis, many other advisors ‘played it safe’ by saddling their clients with illiquid, low-returning annuities and non-traded REITs—products designed by banks and brokerage firms to “limit volatility” and therefore investment returns. And just last year, after the 2016 election, some advisors counseled clients to hold cash for months. It was a costly mistake.

Experience, education, and judgment matter. Remember that so-called experts in the financial media industry are entertainers. Single-day returns are largely insignificant, and your portfolio is tailored to you and your life goals. So we repeat our mantra: stay disciplined and stay the course. And if you ever feel doubt creeping in, give me a call. I’m a skilled and patient hand-holder, and I’m always here to help.

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Wall Street has gone wild! Is it finally time to change your investment strategy?

Wall Street has gone wild! Is it finally time to change your investment strategy?

It’s a strange time for investors.

Consider this: Just last week Gerry, a 65-year-old recent retiree, asked me if she should take on more risk in her portfolio. “The market is doing so well,” she said. “I feel like I’m missing out on all that growth.” My answer was simple. “No!” I explained that her strategy had been very carefully built to support her long-term financial goals—not just to grow her invested funds. It was an important conversation, and wow, is it a good thing she has an advisor to talk her out of emotional decision-making! Just imagine if she’d decided to gamble with her assets and take on more risk just a few days ahead of Monday’s volatility.

Of course, in the face of this week’s rather wild ride in the stock market, you may be asking yourself the opposite question: “Have I taken on too much risk?” My answer to you is the same today as it was for Gerry just one week ago. No! That is, of course, if you have a well-constructed financial plan already in place.

Whether the market is flying high or taunting your emotions with new lows and some bumpy volatility, here are four things every investor should keep in mind:

  1. Investing is not a stand-alone activity.  When the stock market is in the news (which it almost always is), it’s easy to forget that investing is just one piece of your overall financial life. A good financial advisor will work with you to look at that and everything else. What are your goals? What does your personal balance sheet look like? If you haven’t already, how soon do you plan to retire? How long can your existing portfolio provide a reasonable income? How much debt do you have? Do you have a sufficient emergency fund? The answers to these questions determine how much risk you can afford to take when investing. When a new client tells me she only wants to talk about investments and not the rest of her financial life, I know we have some important work to do! (Learn more about focusing on your financial big picture in my blog, Cold, hard cash! (Are you paying attention?).
     
  2. A balanced portfolio will rarely perform as well as the DJIA—or as poorly.  The Dow Jones Industrial Average (DJIA) is an average comprised of just 30 stocks out of a universe of thousands. In contrast, your portfolio includes a diverse menu of different asset types that each play a particular role within your portfolio. Stocks address your need for growth. Bonds address your need for stable income. Cash addresses your need for liquidity. How those assets are balanced—or allocated—in your portfolio depends on how long it will have to serve as your retirement paycheck, how much you’ll have to draw each month to sustain your lifestyle, how many years your assets have to grow, your legacy goals, and more. If your IRA goes down as stocks go up, don’t despair. Rest assured that your portfolio is balanced and diversified to meet your needs.
     
  3. Your best investment in any market is to pay off debt.  Debt is a huge problem in the US. According to this study by WalletHub, the average indebted household held $8,600 in outstanding credit card debt in 2017, and total household debt broke a new record of just under $13 Trillion.[1] If your portfolio is what makes your financial life secure, debt is what does the opposite. While “good debt” such as a home mortgage, student loans, and business loans generate benefits over time, “bad debt” poses serious risk to your financial health. Credit cards, auto loans, and other revolving debt reduce your income, add no value to your wealth, and force you to pay more every month for an item that is losing value. If you are carrying bad debt, use a debtsnowball to reduce and eliminate the debt you have today and avoid taking on more debt in the future. (For more on how debt can impact your future, read my blog There’s no such thing as an unexpected expense.)
     
  4. Your goal is to make work optional and sleep peacefully at night—not make as much money as possible.  It’s so easy to forget the endgame. We see the stock market hitting record highs or taking record dives, and it distracts us from the real goal of financial planning. Ultimately, everyone wants to have enough assets to support themselves and their family comfortably for the rest of their lives. While the definition of “enough” varies widely (check out John C. Bogle’s fantastic book, Enough: True Measures of Money, Business, and Life, for more on that important topic), a comprehensive financial/life plan can remove money stress by giving you the confidence that work will be optional someday and you can sleep peacefully knowing that your finances are secure today and tomorrow—independent of market volatility.

I have a colleague who likes to joke that he has the gift of “20/20 hindsight.” Don’t we all? It’s so easy to say, “I knew it all along!” Knew that the market was overvalued. Knew that you should have held on to Apple stock. Knew that your friend’s new boyfriend was a creep. The truth is you didn’t know it all along; you only feel as though you did now that the outcome is in plain sight.

No one—not even Warren Buffett—knows which way the stock market will go tomorrow. One thing we can anticipate is that we may have returned to more “normal” volatility. After years of historically low volatility and record highs, it may feel a bit unfamiliar, but with a solid plan in place, you can trust that you are safe. If you’re not certain you have a smart plan that’s working toward your long-term goals, let’s chat. As always, we’re here to help.



[1]The Center for Center for Microeconomic Data, Q3 2017

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What’s today’s best investment? Here’s your answer.

What’s today’s best investment? Here’s your answer.

If you have investments in stocks (and I hope you do!), you know that the markets climbed in 2017. And climbed. With an incredible 71 new highs, the markets closed the year up 21% on average, with Emerging Market Stocks (MSCI EM index) leading the pack at 38%. For investors, it was a year to celebrate. But the question now is: where do we go from here?

If you listen to the media, the answers run the gamut from moving everything (yes, everything!) to cash to throwing everything you have (again, everything!) into the high-flying market and cashing in on the rewards. The reality is a lot less exciting. For long-term investors (which I hope you are!), excitement is rarely a good thing. Here’s why:

  • Investing should not be a thrill ride.
    If you want a thrill, go take a spin in a sports car. Let your investments be the reliable sedan that gets you where you want to be, when you need to be there. Investors are paid to take risks. Anticipate the ups and downs, but trust that your well-constructed portfolio will grow at an average of 5% to 7% over the long term. When your neighbor brags about her tremendous gains, don’t fret if yours aren’t quite so amazing. Chances are your portfolio is more conservatively allocated, which means that when the market does turn (which it will, eventually) you’ll continue to be reliably moving forward—with just the right amount of risk for you.

     
  • Toying with a portfolio does not deliver better results.
    On Monday, the news broke that Warren Buffet won his $1 million bet with a top hedge fund manager that he could do better than a hedge fund with a passive, low-cost stock index fund over 10 years. Instead of trying to time the market like his rival, he simply rode out the market—even during the depth of the recession. The result: Buffett’s stock fund achieved a 7.1% compound average return. The hedge fund return: just 2.2%. The US stock market has delivered positive returns in 29 of the last 38 years, delivering gains of more than 20% in 14 of those years. That’s the only information Warren Buffett needed to know to win the bet.

     
  • Even if the market does take a turn, a diversified portfolio won’t get very exciting.
    Again, that lack of excitement is a good thing. In 2017, the stock market saw amazingly low volatility—just 3% at its most volatile point. That’s shockingly low considering that most years, even great ones, usually see pullbacks of 10 to 15%. That means your diversified portfolio didn’t need to rely on its bond holdings last year to protect it from stock volatility. But while your bond holdings likely delivered portfolio returns that were under those of the S&P 500, they’ll be there to calm the waters when the cycle changes in the future.

You get it. A well-constructed, diversified portfolio delivers stable, reliable results over the long term. But what about new investments? With the market so high, what is today’s best investment?

My client Susan got quite the surprise this Christmas when her mother gifted her $14,000. Plus, she received an unexpected work bonus of $50,000. (Cheers to the improving economy!) She called me last week with the big question: “With the market where it is now, should I just hold $64,000 in cash? I don’t want to put it into a market that everyone says is about to turn.”

Susan is not alone. It’s easy to believe the headlines and assume that stocks can’t possibly continue to rise. And yet, historically, that’s precisely what they do. Market analysts and the media have been shouting about an inevitable downturn for years now, and while that grabs a lot of “eyeballs” (which publications both online and off need to sell advertising), they can predict the future as well as you or I can. In other words, they can’t. The one thing we can predict is that the market will continue to rise… over time.

So should Susan take the money that’s burning a hole in her pocket and invest it in stocks today? My answer was not that simple.

I told Susan that before we even began to think about investing, I wanted to review her overall finances. Susan and her husband have an emergency fund, so they have that fundamental element solidly in place. They’d had some home repairs in November and paid for them with a $10,000 check from her HELOC. Plus, they had racked up some holiday debt to the tune of $5,000. The total: just over $15,000 in debt on which she would have to pay interest until it was paid off. Plus, her daughter is a junior in college, and between tuition and room and board, those costs are putting a strain on the family budget.

My recommendation: use the money to pay off the debt entirely, and fully fund the remainder of her daughter’s college, minus what is now in her 529. Once all that was subtracted from the $64,000 windfall, $6,000 remained. Susan would be out of debt, and her daughter’s college expenses would be paid in full through graduation, eliminating that added financial stress each month. We agreed to invest the remaining $6,000 in her portfolio, allocating the money according to her existing strategy.

So what is today’s best investment? My answer is the same as it was for Susan. Your best investment is you.

You’re much more than an investor. You are living your own life. You have your own tax bracket, legacy wishes, and dreams for the future. Whether you have $5,000 to invest or $500,000, look at your financial big picture and make money decisions that help you live your best life—with greater financial confidence than ever. That’s a return the stock market will never, ever deliver. If you have questions or need guidance, know that no matter what the market brings tomorrow, we’re here to help today.

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Climate, weather, and your money

Climate, weather, and your money

If, like I do, you happen to live—or at least spend time—in Southern California, you know that there are two topics on everyone’s lips at the moment: Donald Trump, and the torrential rain. Depending on who you happen to be talking to at the moment, either topic is sure to elicit one of two responses: optimism… or sheer panic. In both cases, taking a look at the differences between climate and weather can help quell the storm.

Here in Southern California, we live in a desert. Despite our earnest efforts to pretend we live in a climate that can support lush lawns and the greenest gardens, our Mediterranean climate is dry in the summer, nearly every summer. Our winters can be wet, but not always. And while shifts in the atmosphere may bring short-term changes to the weather, our physical location on the planet is what drives our climate—which, if it changes at all, changes extremely slowly over thousands of years. (To be clear, I do believe we humans play a critical role in climate change, and that it is changing, just not as quickly as the weather!) The recent rains have lessened the severity of our five-year drought, but because of our climate, there will always be a shortage of water. To survive, we will always need to plan for that reality.

The same is true when it comes to investing. Bull markets and bear markets battle it out based on changes in the economic weather, but our climate, which is rooted in capitalism, remains steady. The markets are always (always!) rising, which is why investors wisely choose to place their money on Wall Street rather than tucking their hard-earned dollars under the mattress each month. History shows us that the climate for investors in the US is favorable, and that reality doesn’t change, regardless of the current weather pattern.

I had lunch with Maggie this weekend. In her 90s, she still has substantial assets, but for obvious reasons, we’ve allocated a meaningful part of her portfolio to bonds. While she understands that that bonds provide stability in her portfolio, Maggie can’t help but wish her portfolio was busy taking even more advantage of the recent surge in equities. Instead of mirroring the DOW’s 16.6% increase since November 1, she’s watched her portfolio fall by 1% in the same time period. It’s not much of a drop, but when the headlines are filled with record-breaking highs in the equities space, it’s hard to sit on the sidelines. She’s never doubted our plan, but looking up from her coffee, she asked timidly, “Should we change course?”

I replied without an ounce of hesitation. “We shouldn’t change a thing.” As I said to Maggie, and what I believe with absolute certainty, is that while the weather has shifted, the climate remains the same.

You don’t need to take my word for it. Warren Buffett just published his always-anticipated Berkshire Hathaway (BRK.A, BRK.B) shareholder letter (you can read the full 29-page missive here). As usual, his thoughts are straight to the point, as well as pointed, and even humorous. This excerpt reiterates my thinking well:

“Early Americans… were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it. This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.”

He goes on to say this:

“American business—and consequently a basket of stocks—is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that… During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”

Maggie isn’t the first person to ask me if it makes sense to steer in a new direction in light of the recent market weather. After all, the current bull market is already well past the average length of a typical bull market. But so is California’s rainfall for the year. Is the market overheating? No one knows for sure. Not even Warren Buffett. What we do know is that the weather is unusual. But though we may want to break out an umbrella every now and then, the climate itself hasn’t changed. Only the weather has shifted. That’s true when looking at the White House as well, which can impact the forecast for the economy and, ultimately, the market. Heed Warren Buffett’s words and trust that “our nation’s wealth remains intact” and “As Gertrude Stein put it, “Money is always there, but the pockets change.”” The key is to continue to make wise, rational investment decisions to help ensure the money in your own pockets stays where it belongs—even during the fiercest of storms.

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5 reasons why you shouldn’t worry about rising interest rates

5 reasons why you shouldn’t worry about rising interest rates

A funny thing happened on Wall Street last week. After all the hoopla around raising interest rates and how it would send investors into a dither, Janet Yellen and the Fed finally made a move, raising rates by .25%. The reaction on Wall Street? Nothing. Nada. Zippo. In fact, the Dow climbed even closer to 20,000 the day of the announcement.

If you were paying attention to the headlines for the weeks leading up to the Fed meeting, that certainly wasn’t the reaction the media was expecting. But if you look at all the factors behind why no one seemed to care, it makes a whole lot of sense. Here are five reasons why many investors couldn’t care less about rising interest rates… and why you probably shouldn’t care either:

1.     The hike was priced into stock prices.
The Fed’s decision had been widely anticipated, so investors were already trading based on the assumption that rates would be raised by at least a quarter percent. As the market continued to climb over the past four weeks, you can bet that every trade that took place happened with the hike as a forgone conclusion. And though rates did go up, no surprises at the Fed meeting meant no surprises on Wall Street the day after.

2.     When you invest, you’re investing in real companies—not “the market.”
When you go to the grocery store, you go to buy tomatoes and milk, not the grocery store itself. The same is true with stocks. Interest rates inevitably impact the market as a whole, but when you invest in stocks, you buy ownership shares of real companies. Apple. GM. Exxon. You own something tangible that continues to grow in value, no matter what interest rates are at the moment.

3.     Bonds are relatively stable assets.
The value of bonds dropped the moment rates went up, but that doesn’t mean you should suddenly switch to a 100% equity-based portfolio. Interest rates are inversely correlated to bond prices, which is why bonds are considered to be every portfolio’s safety net. First, they’re used specifically to hedge against much less predictable equity prices. Bonds are rationally priced based on term and credit quality. U.S. Treasury bonds are considered the world’s “risk-free” asset, with all other bonds measured by the “spread” between its credit rating and U.S Treasury bonds. Second, bond prices are mathematically quantifiable. That’s not the case for stock prices, which are determined at an auction between buyers and sellers and are impacted by fast-changing factors, such as the US and global economies, political instability, investor sentiments or sometimes seemingly nothing (like traffic jams). So don’t run from bonds. Instead, keep reinvesting in this stable asset class to balance risk and reward across your portfolio.

4.     Interest rates can be unpredictable.
Sure, the economy is getting stronger. Unemployment is low. The dollar is strong. Inflation is creeping upward, if slowly. But even with the small hike, interest rates are still at historic lows (remember the ‘70 and ‘80s when interest rates were in the teens?). While the Fed sets the benchmark rate, the market sets longer-term rates, and the resulting “spreads” reflect investors’ sentiments about risk. Since there’s no way to know when rates will rise or to predict the shape of the yield curve (even the “bond kings” often guess wrong about the future), it’s wise to use bonds to stabilize your portfolio and provide liquidity to meet your cash needs throughout your retirement.

5.     Higher interest rates don’t hurt your wallet over the long term.
Yes, rising rates hurt bond values, but as older bonds are sold and reinvested at higher rates, you can potentially increase your long-term returns. It’s also good to keep in mind that high quality, shorter-term bonds perform a lot like cash, providing necessary liquidity in a “safe” investment. (Note that this is not the case for high-yield bonds, which behave more like stocks.) Plus, while stuffing cash assets under the mattress has been a fine choice for the past decade, in a rising interest rate environment, your cash assets can finally start earning interest again. What a thought!

Ultimately, the Fed only sets benchmark interest rates. The increase only directly applies to the target of the federal fund's rate, which banks use to lend to each other overnight, by 25 basis points or .25% to a range of 0.50 to 0.75%. For the rest of the world, the market dictates the rates based on supply and demand (which is why mortgage rates can fluctuate no matter what the Fed rate may be). Of course, the market rate is often aligned with the Fed rate, so all interest rates are expected to continue to rise throughout 2017. Just remember that higher interest rates are the reward for strong policies that have been in place ever since the financial crisis. Those policies—including sustained low-interest rates—fueled growth, and today we have a stronger economy to show for it. That’s good news for anyone who is doing more with her money than stuffing it under the mattress.

Want to understand how your own portfolio can sustain rising rates?  This email address is being protected from spambots. You need JavaScript enabled to view it.  to schedule a time to chat. As always, I’m here to help.

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In Your Best Interest: Our Q1 2016 Newsletter

Click here to view the full newsletter, including recent news, important dates, financial tips & tools, and more.

Market Highlights: Q1 2016

There are two distinct ways to partricipate in the stock market: speculating and investing. Speculators get paid when they sell something to someone else for more than they paid. Speculation involves trading and can deliver dramatic wins and losses. It is a zero sum game because for every buyer there is a seller on the other side of the trade. Investing, on the other hand, is rooted in economic fundamentals and analysis. Investors get paid when companies pay ever-growing dividends that are reinvested and compounded. Investing leverages lower-risk investments to deliver more predictable, consistent returns.

My goal is to invest, grow, and protect your assets. And while speculation is best left to those with a bigger risk appetities, every quarter I must act like a speculator and deliver the current “weather forecast.” But I do so with a caveat. Why? Because in investing, the short-term forecast doesn’t matter. Just like the laws of physics keep the world spinning, the laws of capitalism and economics (and the “miracle of compounding”) reward investors—no matter what the “weather.” The forecast may be wrong about tomorrow’s “big storm,” but surely spring will become summer.

That said, the first quarter of 2016 didn’t include any major storms (even if the seas weren’t entirely calm). The S&P 500 and the Dow Jones Industrial Index eeked out gains of .77% and 1.49% respectively after a late rally. NASDAQ tech stocks, international stocks, and smaller US company indexes all declined slightly, simply because supply is outpacing demand. 

The Federal Reserve’s March report delivered a snapshot of the current economy. It observed many positives: strong job gains and lower unemployment, rising household spending fueled by declines in oil prices, advancing business investminvestments, and slow but steady recovery in the housing sector. On the (slightly) down side, the strong US dollar has weakened exports, and inflation is below the Fed’s 2% target. In reponse, Yellen and the Fed chose to hold off on raising interest rates—a move they hope will encourage the desired upswing in inflation and work force participation.

There was also a variety of non-financial, but signficant global events that may impact the econonomic outlook. President Obama visited Cuba and announced a plan to open trade and tourism with the US. The Presidential campaign veered into the cult of personality, emotion, and violence. Millions of Syrian refugees fled their homes to escape civil war only to be denied refuge and a safe home for their families. Terrorist attacks shook the world again in Ivory Coast, Belgium, Pakistan, Iraq, and Turkey. And orders for the new Tesla 3 are beating all expectations as consumers strive to reduce their carbon footprints.

No quarterly market update would be complete without a forecast, so here it is: Expect longer days, rising temperatires, and a few storms and droughts. Just as predictably, stock prices will fluctuate, speculators will trade, and techonology will amaze us. Enjoy the change in the seasons and be a patient and confident investor!

Questions or concerns? Send me a note. As always, I’m here to help. 

 
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Volatility, escalators, and yo-yos

b2ap3_thumbnail_underactive_escalator.jpgEarlier this month I spoke to a group of women on choosing to choose (the brief version was included in my July 28 blog), yet in the question and answer session, I was asked the inevitable: “Is the market going back up?” My answer: “Yes. Absolutely. Without a doubt, yes!”

If there’s any doubt in your mind about how I can be so emphatic with my answer, it’s probably because the recent market volatility has you, like many others, feeling like you’re on an emotional rollercoaster when it comes to your invested assets. Here’s why I’m not worried:

Volatility is, literally, the up-and-down movement of the market caused by investor sentiments that drive trading activity. Technically, volatility is measured by the standard deviation from expectations, or “normal” market movement. “Normal” is about 5.8% a month and 20% a year. That’s not much change, especially on a daily basis, and we get happily used to those nice, tiny fluctuations. But just like when we’re riding on a real rollercoaster, those little bumps aren’t so bad—it’s the monstrous drops that make our stomachs turn over!

As we’ve seen recently, volatility causes downward stock price pressure as anxious sellers drive down market prices. The current sell-off is being driven by amorphous fears about a slowdown in global growth. In the early 2000s, the cause was poor earnings and devaluations of tech companies. Then came the turmoil of 9/11. In 2008, it was the financial crisis. More recently, Greece and China have been the culprits. Each of these events brought uncertainty, which spurred volatility, which created fear. Of course, fear then impacts the market, which creates a vicious chicken-and-egg situation. The bank rush of the 1930s is a great example. Some banks collapsed, and the fear of more failures caused a run on the banks. Were all banks in trouble? No. But people who had their money in the institutions that did fail lost all their savings (deposit insurance didn’t exist at the time), and that fact caused widespread panic. Clearly fear—especially when it comes to money—can be much more contagious than any plague. The good news is that uncertainty eventually passes. Each crisis, whatever it may be, resolves itself one way or the other. Fear dissipates. And volatility levels return to normal. For investors, the most important thing to remember is that market volatility is temporary while the overall movement of the market is long-term.

Dan (an acquaintance, not a client!) was one of many who let fear drive his decisions back in 2008. He pulled everything out of the stock market to “cut his losses.” His plan, of course, was to put his money back in as soon as things returned to normal. But Dan’s strategy had a major flaw. Now, at the end of a seven-year bull market, Dan asked me if it’s safe to get “back into the market?” My answer, of course, is that investing requires discipline and education. And that if he thinks he has the skill to “speculate” on price fluctuations, well…he’ll likely end up on the wrong side of every trade. If Dan would only take the time to understand investing and the story of the escalator and the yo-yo, then he’d be ready to be a wise investor.

Picture it: you’re on an up escalator playing with a yo-yo. The yo-yo is going up and down on a small scale, while the escalator is going one way—up—on a large scale. Yes, the yo-yo continues to move, but it (and you) continue to move in one direction: up! Now imagine the yoyo is market volatility, and the escalator is the market itself. Even if you’re a really bad yoyo-er (like me) and the yo-yo falls all the way to the end of its string before you wrap it back up again, you’re still continuing to move in the right direction.

Martin Brower is considered by many to be a real estate expert in Orange County. A former Irvine Company exec, he currently writes the column Along the Coast in Orange County’s Coast Magazine. As an expert, he’s often asked, “where is the real estate market headed?” I’ve heard Martin answer, “I don’t know where it’s going, but let me tell you where it’s been.” He then tells his own story of the Westchester home he purchased in the 1950s—what he paid then and today’s price. He didn’t talk about yo-yos, or the collapse in 2008, but he did point out that the trend is clearly up and the change is exponential. Over time. The lesson learned is this: As an asset class, real estate is good, but it’s no greater than any other asset class. The perceived over-performance is the result of the typically very long hold period associated with home ownership. Holding on to your investments—whatever they may be—is the key to long-term success.

So yes, the yo-yo has been going up and down for weeks now. And just as it started to settle down, the Fed opted not to raise interest rates. So we’re back in yoyo territory. But just remember that the escalator is still going up. Maybe not as quickly as we’d all like, but that movement, over the long term, will eventually get us where we plan to go. And if you need a small daily reminder to keep you smiling, just print out a copy of this old newspaper I came across the other day and imagine what a fortune those who invested in 1962 have today—as long as they stayed put and ignored the yo-yo. I hope you’re one of them!

b2ap3_thumbnail_1962-Dow.jpg


Still wondering how the yo-yo will affect your long-term outlook? Email me to schedule a time to chat. As always, I’m here to help.


 

 
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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >