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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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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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Market Alert: Putting the Brexit in Perspective

Market Alert: Putting the Brexit in Perspective

The news was big last night. The British cast their votes, and the outcome was what many had feared—especially David Cameron who resigned in the wake of the historic Brexit vote. He said he will stay to “steady the ship,” but this ship needs some smart hands on deck to safely escape this storm.

The reaction in the US is much more predictable. Global uncertainty never bodes well for stock prices, and that proved true at the opening bell this morning. And yet, at least as I write this morning, the Dow index or (“the market”), is still down less than 3%. To put that statistic in context, just six months ago the market dipped more than 3% in a single day. Since then, we’ve seen a step-by-step recovery. It hasn’t been a smooth upward climb, but even in its volatility, the market has continued to grow at a slow and steady pace.

There’s intense analysis happening at the moment regarding the implications of Britain leaving the European Union, but in reality, only time will tell. What may be most important to remember from a financial perepective is that time is what matters most. It will take time—months or even years—for the situation to play out economically and politically. As an investor, it’s important not to react to the news. While it’s normal to feel unsettled when the market falls, fear is your biggest risk when it comes to long-term financial success.

Here’s what’s important to know:

  • Keep your seatbelt fastened. The market has given us all a bumpy ride for years now. While we’re nowhere near the Dow’s 15,000 level we saw just last year, the uncertainty overseas is sure to continue to shake things up—just as China did last year, and oil prices did in Q1 of this year. The US election in November may also have an impact on market indices. Just be prepared
     
  • Despite what’s happening in the UK and Europe, the US economy is gaining strength. US earnings are solid, employment is up, and there are no indicators of a pending slide. As long as US consumers continue to gain confidence, this should not change.
     
  • Interest rates are likely to remain low. In the wake of the Brexit, the odds are low that the Fed will opt to raise interest rates any time soon.
     
  • Stocks are on sale. Today’s stock prices have no relationship to the underlying value of the companies they represent, and our portfolios are built on strong companies with growth momentum. If you still have time on your side from an investment perspective, now is the time to purchase stocks—not run from them.
     
  • If you’re taking distributions, sit tight. Retirees are often the most fearful in a downturn. And while fear may spur some to pull out of the market, that’s the best way to ensure an immediate loss. If you’re concerned about the impact of the market on your retirement income, let’s sit down and look at the situation together.

The Brexit vote is today’s big news, but my perspective on the market remains the same as one year ago when I wrote Beyond the headlines, it’s an up market after the market tumbled in reaction to the “Grexit,” Greece’s potential exit from the EU. By looking at the big picture, I hope you can watch the global events play out while remaining confident in your personal financial plan.

Of course, if you’re unable to ignore the headlines, and your confidence begins to wane, let’s schedule a call to talk through your specific situation. 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 >