If you’ve only got 30 seconds to understand asset allocation, spend those precious seconds staring at the table below. The main takeaway: stocks beat Treasury bonds and T-Bills on average. For example, over a 1-year period, stocks outperform 61.3% of the time during the last 210 years. Over a longer 30-year period (typical for retirement portfolios) stocks came out on top 91.2% of the time.
This table is from Jeremy Seigel’s book, Stocks for the Long Run.
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 trusted 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:
It’s not hard to see that short, intra-year declines are the norm.
In fact, the average intra-year drop is 14.1%. But despite these temporary declines, the annual returns are positive in 28 of 37 years (76% of the time). During the charted time period 1980 to 2016 the average annual return was 8.5% 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 50 of the 71 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.
529 plans are the best college savings option for most families. Here’s a 30-second primer on how to choose the right one for your family:
Need help making the best 529 choice for your kids’ future?
Give us a call at 704-350-5028 for a free consultation.
The standard argument that active investment managers make when challenged by their clients on why their portfolios underperformed the market is, “you need to judge us over a full cycle.”
Robust results published in today’s Wall Street Journal blow a hole through active managers’ favorite defense. Over the 15 years that ended in December 2016, 82% of all U.S. funds trailed their respective benchmarks. That long time period is more than enough to encompass the active managers’ “full cycle”, boom-bust-boom argument. The findings are noteworthy because it’s the first time 15-year results have become available for this very comprehensive analysis.
The results are even worse when you looks at popular assets classes:
That elusive 8% of all U.S. fund managers that did beat the market 2002-2016 is a slippery target for investors. Most of them did not persistently outperform throughout those 15 years. So you can’t just take today’s top performers and go with them. Said another way, the likelihood of you finding one of these funds ahead of time is very, very small.
You have a key decision — a choice that will materially impact your future life. How will you choose to invest the bulk of your portfolio? Will you go with the 92% odds in your favor (passive management), or the 8% odds in your favor (active management)?
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.
Congratulations to the 3 million young people who have graduated from high school over the past few weeks! Want to be happy and prosper? Consider these 5 words of advice from 20 thoughtful people:
Budget. Save. But enjoy yourself.
Ben Carlson, A Wealth of Common Sense
Live simply. Fees add up.
Kanyi Maqubela, Collaborative Fund
Buy every month, never stop.
Josh Brown, Reformed Broker
Save. A lot. Start immediately.
Bob Seawright, Madison Avenue Securities
Carl Richards, The New York Times
Your potential is an asset.
Noah Smith, Bloomberg
Sleep on it. Then decide.
Sam Ro, Yahoo! Finance
Live on less. Have more.
James Osborne, Bason Asset Management
The world owes you nothing.
Jason Moser, The Motley Fool
Savings is the best investment.
Tadas Viskanta, Abnormal Returns
Perpetually seek your true passions.
Tom Gardner, Motley Fool CEO
“No downside” means “run away.”
Bill Mann, CIO Motley Fool Asset Management
Time is your scarcest asset.
Bryan Hinmon, Motley Fool Asset Management:
Don’t carry credit card debt.
Eddy Elfenbein, Crossing Wall Street
It’s not a race. It’s a marathon.
Craig Shapiro, Collaborative Fund
Focus on what you control.
Phil Huber, Huber Financial Advisors
Invest as soon as feasible.
Matt Argersinger, Motley Fool analyst
Never stop asking questions. Ever.
Chris Hill, Motley Fool radio host
Your best investment is yourself.
Cullen Roche, Pragmatic Capitalism
Spend less than you make.
Matt Koppenheffer, Motley Fool
Source: TMF
The following elegant observation comes courtesy of Jonathan Clements.
Source: JC
Here’s an important reminder if you have an individual retirement account (IRA) or are considering opening an IRA. 2015 contributions to IRAs can still be made up through April 15, 2016.
Make it a double? If you really want to make the most of the growth potential that retirement accounts offer, you should consider making a double contribution this year: a last-minute one for the 2015 tax year and an additional one for 2016, which you’ll claim on the tax return you file next year. That strategy can add much more to your retirement nest egg than you’d think.
2015/2016 Annual IRA Contribution Limits*
*Note: The maximum contribution limit is affected by your taxable compensation for the year. Refer to IRS Publication 590 for full details.
The savings, tax deferral, and earnings opportunities of an IRA make good financial sense. The sooner you make your contributions, the more your money can grow.
If you have any questions or would like to make an IRA contribution give us a call at (704) 350-5028 or email info@nstarcaptical.com.
With the new year off to an anxious start for investors, perhaps it’s a good time to remember some essential facts about down markets. Ben Carlson provide a great run down of 10 bear market truths:
1. They happen. Sometimes stocks go down. That’s why they’re called risk assets. Half of all years since 1950 have seen a double-digit correction in stocks. Get used to it.
2. They’re a natural outcome of a complex system run by emotions and divergent opinions. Humans tend to take things too far, so losses are inevitable.
3. Everyone says they’re healthy until they actually happen. Then they’re scary and investors who were looking for a better entry point begin to panic.
4. The majority of the people who have been scaring investors by predicting a bear market every single month for the past seven years will be the last ones to put their money to work when one actually hits.
5. It’s an arbitrary number. I have no idea why everyone decided that a 20% loss constitutes a bear market. The media will pay a lot of attention to this definition while it doesn’t matter at all to investors. The 1990s saw zero 20% corrections but two 19% drawdowns. Stocks also lost 19% in 2011. Does that extra 1% really matter?
6. Buy and hold feels great during a long bull market. It only works as a strategy if you continue to buy and hold when stocks fall. Both are much easier to do when stocks rise.
7. Your favorite pundit isn’t going to be able to help you make it through the next one. Perspective and context can help, but there’s nothing that can prepare an investor for the gut-punch you feel when seeing a chunk of your portfolio fall in value.
8. History is a broad outline of what can happen in the markets, not what will happen. Every cycle is different.
9. They’re very difficult to predict. All of the valuations, fundamentals, technicals and sentiment data in the world won’t help you predict when or why investors decide it’s time to panic.
10. These are the times that successful investors separate themselves from the pack. Most investors mistakenly assume that you make all of your money during bull markets. The reason so many investors fail is because they make poor decisions when markets fall.
Source: AWCS
It that time of year where the financial media machine is awash with seemingly important predictions for the new year. Despite all the hype, no one can reliably forecast market moving events or trends. Resisting the urge to build investment strategies around faulty forecasts, Bob Seawright provides a quick summary of his top investment ideas for 2016 (or any other year), none of which is dependent upon predicting the future:
Happy New Year and all the best in 2016!
Source: TA
