posted on July 31st 2014 in Austin CFP Team Posts & Market Commentary with 0 Comments /

Several weeks ago, I decided to go without food for four days–a rejuvenating fast. The last time I did this was in my early 20s for Survival, Evasion, Resistance, and Escape (SERE) training in the Navy and it was not voluntary. I’ll reference Wikipedia, as much of the things taught were classified:

“Most higher level SERE students are military aircrew and special operations personnel considered to be at high risk of capture. Training on how to survive and resist the enemy in the event of capture is largely based on the experiences of past U.S. prisoners of war.”

 Having grown up in Coronado with friends whose fathers had been P.O.W.s, I was well informed of the challenges of the hardships they faced, so I took the training seriously. We went about five days without food and experienced significant physical and mental challenges during that time period.

 After all that, why the heck would I voluntarily give up on the pleasure of eating for four days? One reason: it’s a good mental exercise. The games your mind starts playing as you pass by the refrigerator and watch people eat have a way of strengthening discipline. You also realize how much of your social foundation revolves around food when you opt out of essentially one of the social highlights of the day: eating with friends and family. When you lose the food anchor in your day, you can be set adrift. Hunger games are mind games. But mostly the fast was for long term health.

 Foolish? Not healthy? Think again. A recent study showed that fasting for as little as three days can rejuvenate the immune system by getting rid of damaged and inefficient parts and then signaling stem cells to rebuild them.http://www.sciencedaily.com/releases/2014/06/140605141507.htm

I’m not a doctor, so consult your physician if you think about fasting, and continue reading if you’re wondering how this all fits in with investing.

On July 6, the Dow Jones surged above the 17,000 level for the first time in its 118-year history. This is great news for investors holding stocks, but I know the media is stoking the fear of an imminent crash because that’s what “sells.” I also know that because investors love headlines, they’ll be calling their advisors and wanting to make changes because they’ve decided the stock market will readjust. Well, they’re right. It will. It has always made temporary negative corrections–but what’s key to remember is that those corrections have always been relatively short-lived in a long history of positive returns over decades. The emotional feeling during these negative corrections is  that they will last forever and can only result in doom and gloom. Believe me that three days into a four day fast you think it will never end and it’s much the same for investor’s mindset. That is the difference between perception and reality.

Here’s the tie-in: stock market corrections are similar to the body’s reaction to fasting. Damaged and inefficient companies and forces that intertwine globally to provide a basis for valuations are cleared out. This allows the markets to reset, heal themselves and move forward as a proxy for wealth-building enterprises. Ultimately, it’s healthy for the markets and investors. We’ve certainly seen this cycle over the last eight years.

Perhaps you’d like to avoid the correction and wait for conditions to get more favorable before you invest in more stocks, or you are thinking about selling stocks. You might find some research or an article that tells you there is a confluence of indicators that signal you should get out of the market or readjust your portfolio. Those conditions might exist, but you really don’t know their effect. You now have to predict how different investors, governments, sectors and entrepreneurs will react to those conditions. Also, markets are known to go up on bad news as well as good news so you not only have to correctly predict market direction but also time it right.

Then, if the market reacts according to your set of conditions and you happen to make an exit at the right time, you have to go through all of this again on the re-entry, because you’re not smart if you get out on the decline but miss the next ride up. You have to keep doing this for days, weeks, months, years and decades–and all this activity costs money. Finally, don’t forget about all the unknown variables at the time of your decision, as these really wreak havoc on so-called well-researched predictions. Now you understand why market timing has proven so unsuccessful for so many over long periods.

I recently co-hosted Weston Wellington on our radio show. Weston is a guru in our industry when it comes to shining a light on investor behavior and misconceptions of investing. He wrote an article entitled, “He Called The Crash,” which includes this verbiage:

“Market timers often acknowledge that their signals do not provide sufficient guidance to outperform a buy-and-hold, 100% equity strategy. Their goal, they say, is to avoid major bear market losses by holding a large fixed-income allocation during market downturns and capturing a meaningful portion of equity market rewards by increasing stock holdings during the upswing. Reducing bear market losses may be a laudable goal, but as this example shows, it can also be pursued with greater simplicity by adopting a lower equity exposure at all times and ignoring the costs and frustrations associated with constant fiddling.”

A summary quote from Weston: “The moral of the story? Investors should be skeptical of their ability to predict future events and even more skeptical of their ability to predict how other investors will react to them.”

One of my golden rules for investors is to never be forced into a position to sell an asset whose price is down. How to do this? That is in the art and science of professional advice. My clients are ready for not only for a market pullback, but for the subsequent recovery as well.

2014 Q2 Review: Selected Indexes & Model Portfolios

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(Table Disclosures)

Performance for periods greater than one year are annualized. Selection of funds, indices and time periods presented chosen by client’s advisor. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. MSCI data copyright © MSCI 2013, all rights reserved. Barclays Capital data provided by Barclays Bank PLC. * 100% globally diversified stock portfolio net of expenses and fees ** 60% stock 40% bond portfolio net of expenses and fees. See complete disclosures here: https://www.worthpointeinvest.com/dislaimer/

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As can be seen from the indexes in the chart above, stocks generally outperformed bonds and it was another very good quarter for investors. In a reversal from the previous quarter, emerging markets led non-REIT equity returns versus developed markets, including the U.S. As with developed markets, large caps outperformed small cap indices for the quarter. Value indices outperformed growth indices across all size segments with the exception of mid caps. The U.S. dollar depreciated relative to many of the major emerging markets’ currencies. REITs again returned positive performance, outperforming broad market equity indices in the U.S. and developed non-U.S. markets. Actually it was Global REIT Index (exclusive of U.S. REIT’s), not considered a pure equity asset class, that led the quarterly performance for all indicated indexes with a very solid 10.32% return for the quarter.

Interest rates across all U.S. fixed income markets declined during the second quarter. The decline in intermediate- and long-term rates, coupled with relatively unchanged short-term rates, led to a flattening of the U.S. Treasury yield curve.

Self-deceptions can make us construct flimsy, if superficially logical, stories around what has happened in the markets and project it into the future.The financial media does this because it has to. Journalists are professionally inclined to extrapolate and they will often derive universal patterns from what are really just random events. Building neat and tidy stories out of short-term price changes might be a good way to win ratings and readership, but it is not a good way to approach investment.

Whether it’s your body responding to the downturn in the consumption of food, or your emotions responding to a downturn in the markets, periods of decline can create conditions ripe for sustained health. Just remember that during those periods, hunger games and mind games will be tempting you at every step. A little bit of guidance and discipline will go a long way toward getting you through these periods for a happy and healthy life.

MHS

(*WorthPointe Model Portfolio Disclaimer: Performance results assume the reinvestment of dividends, ordinary income and capital gains and bi-annual rebalancing. The performance of the strategy reflects, and is net of, the effect of annual investment management fee of 1%, billed monthly. Monthly fee deduction is a requirement of our software used for determining historical performance. Actual advisory fees are deducted quarterly. Depending on the size of your assets under management, a client’s investment management fee may be less. Mutual fund fees and expenses have been deducted from the simulated index data. Although index mutual funds minimize tax liabilities from short and long term capital gains, any resulting tax liability is not deducted from performance results. Performance results do not reflect transaction fees and other expenses charged by broker-dealers. This is due to the model portfolios not representing actual trading. S&P 500 data provided as a reference point only and is not intended as a benchmark. The S&P 500 also serves as an indication of market conditions over the course of the period which performance results are displayed. The volatility of the S&P 500 Index is different from that of the model portfolios. This difference in volatility varies increasing across the model portfolios as the amount of fixed income in the “WP” portfolios increases. The S&P 500 index only contains equity positions.

The performance information presented in the chart or table represents backtested performance based on combined simulated index data and live (or actual) mutual fund results from Jan 1, 1991 to period ending date shown using the strategy of buying, holding and bi-annual rebalancing globally diversified portfolios of index funds. Backtested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational purposes to indicate historical performance had the index portfolios been available over the relevant period. WorthPointe did not offer the index portfolios until June 2007. Prior to 2007, WorthPointe did not manage client assets. Client portfolios are monitored and rebalanced, taking into consideration risk exposure consistency, transaction costs, and tax ramifications to maintain target asset allocations as shown in the model portfolios.)

Morgan H. Smith Jr. IMBA CFP® | Partner
(800) 620 4232 ext. 708 | morgan.smith@worthpointeinvest.com
Blog: https://www.worthpointeinvest.com/category/by-morgan-smith-cfp

WorthPointe Wealth Management
Office: (800) 620-4232 | Fax: (858) 400-7415
https://www.worthpointeinvest.com

about the author: Morgan H. Smith Jr. IMBA CFP®

Morgan Smith Jr. IMBA, CFPMorgan H. Smith Jr. IMBA CFP, who has been a fee-only financial planner for over 12 years, specializes in wealth management for successful families, business owners, retirement plans and institutions requiring a disciplined fiduciary process.

An Assistant Professor at the University of San Diego, Morgan has been a frequent speaker to many professional organizations and has appeared on CNBC, Fox Business New Live and is a founding member of the Strategic Trusted Advisors Roundtable.

Learn More and/or Contact Morgan

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