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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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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 >