Investing 101 - Charlotte Financial Planning & Advice

Strategy is your antidote to hysteria at T-27 days

The coronavirus is still very much with us, as is much of the economic dislocation occasioned by the resulting lockdowns. Granted, we are evidently closing in rapidly on a vaccine—indeed, a number of vaccines. But it may be quite some time yet before most of us will get access to a vaccine, and frustration may abound. Moreover, in the coming weeks we will have to go through a hyperpartisan presidential election, with a variety of voting issues we’ve never had to deal with before.

So before we’re further engulfed by these multiple unknowns, we want to take a moment to review what we as investors should have learned — or relearned — since the onset of the great market panic that began in February/March. And that ended when the S&P 500 Index regained its pre-crisis highs in mid-August.

The lessons, it seems to me, are:

No amount of study — of economic commentary and market forecasting — ever prepares us for really dramatic events, which always seem to come at us out of deep left field. Thus, trying to make investment strategy out of “expert” prognostication — much less financial journalism — always sets investors up to fail. Instead, having a long-term plan, and working that plan through all the fears (and fads) of an investing lifetime, tends to keep us on the straight and narrow, and helps us to avoid sudden emotional decisions.
The equity market went down 34% in 33 days. None of us have ever seen that precipitous a decline before — but with respect to its depth, it was just about average. That is, the S&P Index has declined by about a third on an average of every five years or so since the end of WWII. But in those 75 years, the S&P Index has gone from about 15 to where it is now. The lesson is that, at least historically, the declines haven’t lasted, and long-term progress has always reasserted itself.
Almost as suddenly as the market crashed, it completely recovered, surmounting its February 19 all-time high on August 18. Note that the news concerning the virus and the economy continued to be dreadful, even as the market came all the way back. We think there are actually two great lessons here. (1) The speed and trajectory of a major market recovery very often mirror the violence and depth of the preceding decline. (2) The equity market most often resumes its advance, and may even go into new high ground, considerably before the economic picture clears. If we wait to invest before we see unambiguously favorable economic trends, history tells us that we may have missed a very significant part of the market advance.
The overarching lesson of this year’s swift decline and rapid recovery is, of course, that the market can’t be timed — that the long-term, goal-focused equity investor is best advised to just ride it out.
These are the investment policies our clients have been following all along, and if anything, our experience this year has validated this approach even further.

A word now — really just a repetition of what we’ve said to you before — about the election. Simply stated: it’s unwise in the extreme to exit the quality equity investments you’ve been accumulating for your most cherished lifetime financial goals because of the uncertainties surrounding the election.

Aside from the self-inflicted wound of incurring capital gains taxes, your chances of getting out and then back in advantageously are historically very poor, nor can we possibly be helpful to you in attempting to do so. As we have done all year — and as we do every election year — we urge you to just stay the course.

As always, we’re here to talk any and all of these issues through with you.

Thank you, as always, for your support and your engagement. It is a privilege to know you.

The Investment Answer …simple, but not easy?

Everyone wants to know how to earn the most money with their investments. We all want that, right? Well, the answer is so simple you can scribble it on a cocktail napkin. We made a short video to share that sketch with you and to give you the answer. But be warned! There’s a paradoxical catch — “simple” doesn’t necessary mean “easy.”

Transcript:

Everyone wants to know how to earn the most money with their investments. We all want that, right? Well, the answer — The Investment Answer — is so simple you can scribble it on a cocktail napkin. That’s exactly what my friend and New York Times columnist Carl Richards has done for us in this sketch.

These are the factors that drive portfolio returns in the real world. The big circle on the left are the heavy hitters in rank order of importance. While the tiny circle in the bottom right reflects what doesn’t work.

By far the most influence is wielded by your behavior as an investor. That’s #1 by a wide margin. Do you take the long view with your investments? Do you understand that short-term volatility is normal? And, do you appreciate that pullbacks are temporary and the uptrend is permanent? The second biggest driver of returns is the percentage of stocks in your portfolio. And then what kind of stocks? Small companies have outperformed large companies over the long haul. And, value companies — those priced at a discount relative to their intrinsic value — outperform growth companies over the long term.

What’s not part of the investment answer? What’s is not a path to investing success? Marketing timing, stock picking, CNBC, and your brother-in-law’s advice.

Our team of PhDs at NorthStar Capital Advisors created this data-driven and time-tested approach for carefully managing our clients’ money. It’s formed by observation, by academic research, and by our real-world experience of successful investing over the past 14+ years.

But knowing the answer doesn’t necessarily translate to the success that we all seek. Think about our health. We all know how to live a healthy life, right? Nutrition and exercise. There’s the answer — The Health Answer — But do we faithfully practice these day in and day out, year after year?

To quote Warren Buffet, one of the greatest investors of all time, “Investing is simple, but not easy.” There’s the crucial paradox. “Investing is simple, but not easy.”

We practice the principles of long-term investing that have most reliably yielded favorable long-term results. Those principles are: planning; a rational optimism based on experience, and finally — patience and discipline. If you have any questions about “the investment answer” or that paradox of simple but not easy? We would love to hear from you.

As always, thank you for watching, we appreciate the opportunity to support your financial success, and please be well.

Climate risk (+ baby jaguar)

Need some distractions from your day? Scroll down to the bottom of this article. There’s a baby jaguar.

But first, let’s talk about climate change.

The wildfires, hurricanes, and floods we’ve seen in 2020 (on top of an already-awful global pandemic) make this an important conversation to have.

Think climate change isn’t an issue? Well, the market consensus is moving in the other direction.

Insurers, government entities, and large investors are treating climate change as a major systemic risk to financial markets.¹

Why? Because many companies and sectors are at risk from the costly heatwaves, wildfires, droughts, floods, and hurricanes that come with a warming planet.²

Do scientists agree on climate change? Yes, the vast majority of actively publishing climate scientists – 97 percent – concur that humans are causing global warming and climate change.

Most of the leading science organizations around the world have issued public statements expressing this, including international and U.S. science academies.³

So, what does climate change mean for investors?

Investors worry that climate risk could cause the prospects of certain companies to drop dramatically and ricochet throughout the financial system (much like what happened during the 2008 financial crisis).

But, unlike a global issue such as the coronavirus, the effects will play out differently around the country and the world.

Flood- or wildfire-prone areas could experience disruptions in business or find it difficult to insure homes and structures against damage.

Agriculture could be damaged by droughts and heat stress.

Already-warm areas could become too hot for comfortable habitation.

But, if the world goes all-in on sustainability too suddenly, there’s also a danger that the “transition risk” caused by new regulations or widespread shifts in energy use could also hurt markets or certain sectors of the economy.⁴

Well, what’s the good news?

There’s always hope. Many of the worst effects of climate change will play out over years and decades, not weeks and months.

There’s time for people, businesses, and governments to adapt. And humans are infinitely adaptable.

And there’s hope that the worst-case scenarios about a hotter world might not come to pass.⁵

I believe that optimism and pessimism can (and often should) co-exist.

I’m pessimistic about the climate path we’re on.

I’m optimistic that we will make the changes needed to get on the right path and steer away from the worst effects of climate change.

As a financial planner and wealth manager, I’m also staying on top of the growing body of risk models and research to help my clients chart a path through an increasingly uncertain world.

Ok, enough about climate change. Here are the distractions I promised.

Here’s a jaguar kitten learning how to swim.

And a four-year-old playing Mozart.

And a livestream of the jellyfish at the Monterey Bay Aquarium (with music!).

Deep breath. We can do this.

What do you think? Are you worried about climate change?

What do you think we should do about it?

Warmly,
Chris

Chris Mullis, Ph.D., CDFA®
Founding Partner

Financial Planning.
Wealth Management.
Since 2006AskNorthStar.com
(704) 350-5028

P.S. Markets have been volatile this month. It’s to be expected with so much uncertainty swirling about. We’ll reach out if I have anything critical to share.

¹_{https://www.nytimes.com/2020/09/08/climate/climate-change-financial-markets.html} _{https://www.nytimes.com/2020/07/21/climate/investors-climate-threat-regulators.html}

²_{https://www.spglobal.com/en/research-insights/featured/the-big-picture-on-climate-risk}

_{³https://climate.nasa.gov/faq/17/do-scientists-agree-on-climate-change/}

⁴ _{https://www.bankofengland.co.uk/knowledgebank/climate-change-what-are-the-risks-to-financial-stability}

⁵_{https://www.scientificamerican.com/article/the-worst-climate-scenarios-may-no-longer-be-the-most-likely/}

Frothy? Bubbles?

We’re not writing about cappuccinos, champagne, or bubble bath.

We’re talking stocks.

You may have noticed that the shortest bear market in history is over, and markets recently hit new record highs.

Will stocks keep going higher? Will they stay volatile?

Is another bear market around the corner?

Maybe. Maybe not.

As is pretty common in these situations, market strategists are split.

Some see a new bull market that reflects a recovering economy.¹

Others see troubling signs of a bubble that could burst.²

What could push stocks higher?

A market-ready COVID-19 vaccine or major treatment breakthrough that reignites optimism.
More government stimulus that supports consumers and businesses.
Good economic numbers that suggest we’re on the other side of the recession and the recovery continues.

What warning signs are flashing?

A rally mostly powered by tech mega stocks that isn’t reflected in the broader market.
Uncertainty around a November election that’s already contentious.
A possible “Minsky moment” market collapse fueled by the Fed’s easy money policy and unsustainable stock prices.³
Predictions of a second wave of infection that could provoke more shutdowns.

Bottom line, we can’t predict what comes next in the market and that’s okay. Why? Because it’s all short-term “noise.” History shows that all stock market declines are temporary interruptions in a perennial uptrend.

Since we no one can predict the future and no one can time the market, we’re focused on helping our clients stay fully invested which is the only sure way to capture the entirety of the market’s permanent advance. Those powerful portfolio returns over the long term are the reward for staying calm.

2020 has been the strangest year of our lives (probably yours, too), and it’s foolish to try to time markets right now — or any time for that matter. If you’re thinking about big moves or feeling anxious about what comes next, please reach out. We’ll talk through your ideas or concerns.

¹_{https://www.cnbc.com/2020/09/08/goldman-sachs-10-reasons-the-bull-market-has-further-to-run.html}

²_{https://www.cnbc.com/2020/09/07/stock-markets-cio-says-tech-bubble-not-expected-to-pop-anytime-soon.html}

³_{https://www.cnbc.com/2020/09/03/markets-are-facing-a-potential-minsky-moment-collapse-strategist-says.html}

Could the election tank the market? 3 things you need to know

The 2020 election is around the corner, adding another layer of uncertainty to an already volatile market.

This could be one of the most divisive races we’ve seen. We can’t predict its outcome or what it could mean for the economy.

So how can we keep a level head and make informed decisions amid so much chaos?

We made a quick video discussing three things you need to know to help protect your investments in the face of the unknown.

Video Transcript:

This is the FOURTH presidential election that we’ve navigated in our 15 years of helping our clients reduce taxes, invest smarter, and live better.

And we’re here to help you stay level-headed — even in times of chaos. The 2020 election is coming up fast, and we’ve had worried folks ask us: Will it tank the market?

In this video, we’ll give you three things to keep in mind so you can plan for uncertainty.

2020 has been wild, to say the least. And the upcoming election could be one of the most divisive races we’ve ever seen. Add a pandemic, confusing market trends, and it’s no wonder people are worried.

But let’s trade panic for perspective. Here are three WAYS we can prepare for election uncertainty:

#1 — It’s normal for markets to be more volatile in election years. But remember, other factors are always at play, like business cycles, interest rates, corporate profits — and, of course, unpredictable events like the pandemic. So what can you do? Take a deep breath and focus on the post-election period. If you want, we can help you create a plan to pursue long-term success, no matter who wins in November.

#2 — Markets don’t like uncertainty, and they don’t like surprises. So we can expect things to be a bit bumpy in the short term, especially in the weeks before and after the vote.

#3 — Regardless of who wins, the government will be focusing on the coronavirus and the country’s economic recovery. We don’t know what this will look like or how quickly things will happen. With some preparation now, we can help you create a financial plan that accounts for this uncertainty — and you can be less worried about your portfolio.

Listen, we don’t have a crystal ball. But we do have the advantage of knowing what’s happened in the past, and being able to prepare for what could happen in the future. While the past can’t predict the future, we can look to it for powerful perspective.

If you have questions about how the 2020 election might affect your portfolio or you’d like to talk one-on-one, please reach out.

As always — we thank you for your support, we appreciate your engagmement, and please be well.

3 cognitive biases that cheat most investors (and how to beat them)

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

If you’re looking at headlines or feeling the pressure of the downturn, it’s easy to think you’re not in control.

And it’s true—you have limited control over external circumstances (like the pandemic). But you have complete control over yourself and your behavior.

Times like these are when it’s most important to dig deep, root out bad habits, and come out on the other side mentally stronger than before.

We made a short video showing you exactly how you can overcome the hardwired biases that can cheat you, including the huge mental trap that even Warren Buffett has to fight.

(You’ll have to watch the video to find out what it is!)

You can watch it here.

WATCH NOW

So what if the market does go down again?

Over the past several weeks, the stock market has experienced both the fastest crash and the most robust bounce ever seen. Right now, while things are relatively calm, I want to underscore the following points that are profoundly important to your investing success.

When stock prices are going down, the enduring value of the underlying companies is going up. A market decline is therefore always to be experienced as a sale, and the very nature of sales is that they are temporary. The lower prices go, the more value is to be had at those prices. You instinctively know this about virtually everything else in your economic life. If you can’t apply that same correct instinct to the stocks of America’s and the world’s great companies, it’s not probable that you can ever become a successful investor.
Staying fully invested during temporary market declines is the only sure way to capture the entirety of the market’s permanent advance. It is not possible consistently to sell out of falling markets, and later buy back into already advancing markets, thereby capturing the long-term returns of equities. Those returns are your reward for staying calm.
You never try to make long-term investment strategy out of short- to intermediate-term disruptions. We have a plan for getting you to the goal you need to reach, in order to secure a successful retirement. To achieve that goal, you need to invest consistently. And to stay invested, not just when the sun is shining.
Perhaps more today than ever, bonds, CDs and the like are not an alternative. At the moment, the cash dividend of the S&P 500 is close to three times the yield on the 10-year Treasury note. Even if dividends were to halve in the current crisis, and interest rates stayed where they are, stocks would still yield more than the 10-year Treasury. I’ve never seen that before, and when this crisis passes, I don’t ever expect to see it again. Bonds are simply not, in my judgment, a rational alternative to stocks for the long-term investor.
How low the stock market ultimately goes in response to the economy’s cardiac arrest is both unknowable and — to the long-term, goal-focused, planning-driven investor — irrelevant. (Unless, of course, he/she is still in accumulation mode, in which case a renewed decline would be a genuine godsend.)

I hope sharing our enduring principles helps both steady you in the present and focuses you on your long-term success. As always, if you have any questions don’t hesitate to give me a call.

When the world goes as haywire as it’s done lately, you may have occasion to question your investment strategy — and even your overall financial planning. If so, you may wish you could get an objective second opinion you can trust, from a friend. I hope you’ll know me to be that friend.

Wishing great success,
Chris

Chris Mullis, Ph.D.
Founding Partner

Financial Planning.
Wealth Management.
Since 2006

AskNorthStar.com
(704) 350-5028

V, W, L, or Swoosh? (no, it’s not a meme)

Everyone you and I have ever met has been affected by the coronavirus.

My childhood friends in Charlotte, strongman Kristofer Hivju, and the folks I met in Lesotho, Africa.

And it’s Day #18 in the hospital for my father-in-law fighting the disease. He’s now in a federal field hospital and hopefully coming home very soon.

It’s likely that every human on the planet has been affected by COVID-19.

I’m not sure that this kind of event has ever happened before in human history.

Though it’s sad that it took a disease to bring us together, it reminds me of how deeply connected we all are and how much our daily existence depends not just on our community, but on people we’ll never meet in far-flung corners of the world.

That very interconnectedness is what’s making this pandemic so dangerous to us and the economy.

Economists believe we entered a recession in March, and the latest data continues to show the economic damage:¹

Retail sales dropped 8.7%, the biggest drop since the government started tracking the data in 1992.²
Spending on travel, restaurants, and shopping overall is way down (though grocery sales and delivery are up).³
The number of new unemployment claims skyrocketed to 22 million, erasing the job gains since June 2009.⁴

Despite the ugly economic data, stocks just wrapped their best performance in decades.⁵ What gives?

“Irrational exuberance,” to quote Alan Greenspan. Stocks are famous for rallying in the face of bad numbers, and it’s clear that investors are expecting government stimulus to lead to a quick recovery as states emerge from lockdown and business picks up.

Are bullish investors right? Will the economy recover quickly?

It’s impossible to say right now. How long the downturn lasts and how soon the economy recovers depend on answers to some critical questions:

When will widespread testing, tracing, and treatment allow lockdowns to ease? Reopening America too soon and igniting a fresh wave of the pandemic will prolong the pain.
Will employers maintain relationships with their laid-off staff? You can’t just flip a switch and reopen a closed business without skilled workers. The longer the shutdowns continue, the harder it will be for companies to staff up.
How soon will consumer spending return? “Deferred” demand that’s pent up and just waiting for restrictions to ease could cause spending to surge; “destroyed” demand that’s not coming back could cause spending to remain depressed for longer. Here’s a simple example: deferred demand would be rescheduling a canceled vacation. Destroyed demand would be deciding to skip it entirely.

V, W, L, or Swoosh?

The “shape” of the eventual recovery is being hotly debated because it gives us insight into what would need to happen (and how long it could take).⁶

“V-Shaped” Recovery: A short, sharp decline and then a quick rebound is the best-case scenario. In this case, lockdowns lift soon and spending surges, driven by pent-up demand and government stimulus.

“W-Shaped” Recovery: A “double-dip recession” is a worst-case scenario that could happen if the easing of restrictions leads to another wave of infections and lockdowns, or the economic damage causes a second downturn.

“L-Shaped” Recovery: An L represents a sudden plunge and fitful recovery if lockdowns continue through the year and growth is slow to return.

“Swoosh-Shaped” Recovery: A tick or swoosh is a sharp downturn followed by a gradual recovery as lockdowns are eased cautiously across the country.

We can’t predict what the road ahead will hold, but I think it’ll look less like a return to “normal” and more like a way to live with the way COVID-19 has overturned ordinary life.

What do you think? Will your life be back to normal this summer? Will we be riding waves in the warm Atlantic Ocean and romping down the Appalachian Trail relatively soon?

Be well,
Chris

Chris Mullis, Ph.D.
Founding Partner
NorthStar Capital Advisors

Financial Planning.
Wealth Management.
Since 2006

AskNorthStar.com
(704) 350-5028

P.S. Now that stimulus money is going out, the scam artists are slithering out to get their piece. Here’s what you need to know:

Scammers are impersonating the IRS and contacting folks by mail, email, phone, and text to ask for personal information.
The IRS is not contacting taxpayers about stimulus checks. If you receive a call from someone asking for information, hang up. Do not click links in emails or text messages purporting to be from the IRS or the Treasury Department. If someone asks you to pay an upfront fee or to confirm your bank details to receive stimulus money, it’s definitely a scam. Contact your bank or our office at (704) 350-5028 if you’re not sure.
Please share this information with those you love, especially parents, grandparents, and elders who may be at higher risk of being victimized.

¹_{https://www.cnbc.com/2020/04/15/us-retail-sales-march-2020.html}

²_{https://www.msn.com/en-us/money/markets/coronavirus-delivers-record-blow-to-u-s-retail-sales-in-march/ar-BB12FaEi}

³_{https://www.nytimes.com/interactive/2020/04/11/business/economy/coronavirus-us-economy-spending.html}

⁴_{https://finance.yahoo.com/news/coronavirus-covid-weekly-initial-jobless-claims-april-11-192401571.html}

⁵_{https://www.wsj.com/articles/the-stock-market-is-ignoring-the-economy-11587160802}

⁶_{https://www.weforum.org/agenda/2020/04/alphabet-soup-how-will-post-virus-economic-recovery-shape-up/}

Great Expectations

Expectations are very important. If you know what to expect, you shouldn’t be surprised. And if you’re not surprised, you won’t panic.

Coaching clients on what to expect and how (not) to respond to extraneous events is our defining role as a real financial advisor.

We invest in stocks because of their superior returns. Those historically higher returns are a reward for tolerating volatility (i.e., the “volatility premium”). But what does stock volatility look like in the real world? What pattern of price variability should we expect?

Well, here it is in its most elegant of graphical forms (click image for a bigger view).

Here’s how to read this chart:

The intra-year decline versus the annual return of the S&P 500 are plotted vertically with years running horizontally from 1980 through year-to-date 2019.
The annual return (grey bars) show the calendar year price increase. For example, in 1980 stocks climbed 26% for the year.
The intra-year decline (red dots) is the largest market drop from peak to trough during that year. For example, in 1980 we experienced a 17% drawdown.
Putting these together, in 1980 the stock market dipped 17% before closing up 26% by the end of the year.

It’s not hard to see that short, intra-year declines are the norm.

In fact, the average intra-year drop is 13.9%. But despite these temporary declines, the annual returns are positive in 29 of 39 years (74% of the time). During the charted time period 1980 to 2018 the average annual return was 8.4% This pattern is persistent. If you look back to 1946, the average drawdown is a remarkably close 13.8%, and the price return was positive 51 of the 73 years (70% of the time).

History shows the declines are temporary, the advance is permanent.

Think about how the average person responds to these intra-year declines. The financial media is screaming about the crisis du jour which is consistently characterized as the end of the world (“I’ve lived through some terrible things in my life, some of which have actually happened.” — Mark Twain ). Data shows the average investor, without the support of a caring, empathetic coach/advisor, consistently sells at the worst of times – i.e., during one of these perfectly normal and temporary pullbacks.

Volatility does not equal a financial loss unless you sell.

In our humble opinion, possessing an informed expectation, one that allows you to ignore short-term gyrations to capture long-term gains, is a Great Expectation.

Asset Management vs. Financial Planning

At a 100,000-ft level, we do two things in our financial advisory practice: Asset Management* and Financial Planning. Although these two functions are distinct, they are very much interrelated. Both are essential components for our client families’ long-term success, but it’s important to understand and appreciate the differences:
(* Asset Management also falls under the monikers of “investment management” or “portfolio management”)

Asset management is about asset allocation, expected returns, risk tolerance and time horizons.
Financial planning is about making wise choices about the use of debt, setting up college savings plans, tax efficiency, estate planning and ensuring your insurance needs are taken care of.

Asset management is about managing investments.
Financial planning is about managing investors.

Asset management is about portfolio construction and risk management.
Financial planning is about comprehensive planning and emotional management.

Asset management is about measuring portfolio performance by comparing results to predetermined index benchmarks.
Financial planning is about measuring your performance against your true benchmark — your goals.

Asset management is about allowing your money to work for you to help you reach your financial goals.
Financial planning is about helping people define their goals, dreams, desires and fears.

Asset management is about creating a process that guides your actions in a wide variety of market environments.
Financial planning is about implementing a plan and making corrections along the way as life or market and economic forces intervene.

Asset management is about creating a portfolio that can survive severe market disruptions.
Financial planning is about creating a financial plan that can survive severe life disruptions.

Asset management deals with financial capital.
Financial planning deals with human capital.

Asset management is about growing and/or preserving your wealth.
Financial planning is about understanding why money is important to you personally.

Asset management is about where to invest a lump sum.
Financial planning is about how and when to invest a lump sum.

Asset management is about asset allocation.
Financial planning is about asset location.

Asset management is about creating policies to guide your actions in the face of economic and market uncertainty.
Financial planning is about helping people make better decisions with their money in the face of uncertainty that is impossible to reduce.

Asset management helps you understand how much you need to earn on your investments to meet your future spending needs.
Financial planning helps you understand how much you need to save meet your future spending needs.

Asset management helps you figure out where to take your money from when you need to spend it.
Financial planning helps you figure out where to spend your money in a way that makes you happy.

Asset management helps you grow your savings to meet future consumption needs.
Financial planning helps you plan and budget for future consumption needs.

Asset management is about creating a long-term process to guide your actions in the markets.
Financial planning is about creating systems that allow you to spend less time worrying about your money.

Asset management is about reducing the anxiety that comes from the volatile nature of the markets.
Financial planning is about reducing the anxiety that comes from making important decisions with your money.

Asset management involves growing your wealth so some day you can become wealthy.
Financial planning involves figuring out what a wealthy life means to you.

To get the most benefit from asset management, you really need comprehensive, well thought-out financial planning.

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