posted on January 21st 2016 in Austin CFP Team Posts & Market Commentary with 0 Comments /

This title was inspired by a book called “How Not To Be Wrong: The Power of Mathematical Thinking”.  I was tempted to title this article the same, but most investors are ruled by their emotions so “How Not To Be Worried” is most definitely apropos given the current market volatility.

There’s a difference between rational reflection and worrying. The former can reveal the truth which of course can be hard to swallow sometimes. The latter will not bring anything positive to your life or financial situation.

So let’s do a little rational reflection regarding the use of your money invested in the markets by asking two simple questions to help analyze your emotions as they relate to your investments.

Question: Do you need the money today?

“No, I do not need the money today.” You know that the equity markets go up and down in the short term but have ALWAYS produced a positive return in the long run. And a healthy one at that. That’s why people invest in stocks. So why the worry? If you’ve aligned your long term goals with your diversified strategy then focus on your goals. If you are worrying about your investments from day to day, one might presume that you either enjoy worrying or that you are stuck in a psychological rut that will not be a positive in your life.  

Important Note: Many people get worried because they or their advisors are making bets with their money, i.e., making investment changes based on forecasts or feelings. They try to time the market, go to cash, short stocks, get back in, bet on a company or a sector. If you’re doing this then yes, be worried. Why? Because you may make big mistakes and not get those long term results of the markets. Furthermore, there is a cost to all of that activity in fees in expenses that put a further burden on return.

“Yes I do need money today”: Then you’ve set aside enough cash and globally diversified high-credit-quality lower-duration bonds to satisfy your cash flow needs for at least a couple years thus not being forced into a situation where you have to sell equity investments that are down in the short term. This fundamental investment strategy can help eliminate the need to worry and is important for retirees pulling income from their portfolios.  Oh. You haven’t done this? Then yes, be worried or contact me to get you set up.

I get it, it’s not fun when the stock market goes down. Most people worry about volatile periods because of their past experiences doing things the wrong way. It really is quite simple not to have to worry about your nest egg if you stick to the principles of globally diversified indexed investing. Why? Again, over the long run, equity markets have always produced a higher return than cash, inflation, and bonds. It’s the investors that have tried to outsmart the market have not always done so.

And here’s the question that always comes up. “Isn’t there something that we can do in advance of market movements that will improve my performance, reduce my loss, improve my gain? I just see it coming. I can feel it!”

Yes, you can make a lot of changes to your investment strategy. You’ll hear one hundred ideas a day. Unfortunately, as I hope you already know, no one can predict the future, so why would you bet your nest egg on a prediction of the future? You can make changes based on forecasts, but they may be the wrong changes. That is a bet. A gamble. Something you don’t want to do with money that you cannot afford to lose.

The key is understanding that there is no benefit in worrying about things out of your control like when and how the markets deliver returns to investors.

There are definitely things you can do to improve your return but they must be done prior to market cycles with the understanding that you don’t know when and how market fluctuations will occur. You can control your costs, the magnitude of your diversification, your tax-efficiency, and your allocation to market premiums (equity, size, price to book, and profitability). At a high level, that’s it. Nothing else has been proven to work over the many years and decades you expect your investments to be working for you. On a final note, it does sound simple but there is a lot of academic research behind these proven strategies and executing them well takes a lot of work.

2015 Q4 Index and Model Portfolio Review

3 Months 6 Months 1  Year 3 Years 5  Years 10 Years Since 12/1990
Russell 2000 Index 3.59 -8.75 -4.41 11.65 9.19 6.80 10.64
S&P 500 Index -7.04 0.15 1.38 15.13 12.57 7.31 9.90
S&P United States REIT Index (gross div.) -6.98 9.20 2.54 11.00 11.85 7.29 11.74
S&P Global ex US REIT Index (gross div.) -2.05 -2.15 -2.77 3.97 6.72 4.18 7.60
MSCI EAFE Index (gross div.) -4.75 -5.92 -0.39 5.46 4.07 3.50 5.84
MSCI Emerging Markets Index (gross div.) -0.73 -17.18 -14.60 -6.42 -4.47 3.95 8.78
Barclays Global Aggregate Bond Index (unhedged) -0.92 -0.08 -3.15 -1.74 0.90 3.74 5.70
Barclays US Aggregate Bond Index -0.57 0.65 0.55 1.44 3.25 4.51 6.20
Barclays US Government Bond Index -0.91 0.78 0.86 1.01 2.77 4.10 5.92
WP100 -2.83 -7.88 -5.06 7.53 5.92 4.93 10.60
WP60 -1.35 -4.94 -3.13 4.63 3.82 4.55 8.22

 

(Table Disclosures and https://www.worthpointeinvest.com/disclaimer/) Performance for periods greater than one year are annualized. Selection of funds, indices and time periods presented are chosen by the 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. “First Full Month” is for WP100 and WP60 is 09/1990

U.S. Small company stocks (Russell 2000) fared the best for the quarter out of the indicated indexes with a 3.59% return for the 4th quarter while the S&P 500 fared worst with a -7.04% for the quarter. Considering all of the international headlines concerning Europe and China, it might be surprising to some that the S&P 500 did worse than other global indexes. Bond indexes held up well given the increase in interest rates and all of the speculation surrounding rate hikes.

The US economy grew modestly during 2015. Gross domestic product (GDP) increased only 0.6% in Q1 before improving to 3.9% in Q2 (year over year). Growth slowed to 2.0% in Q3, matching the average annualized growth for the past six years. Q4 GDP growth was forecasted to decline to 1.0% and GDP growth for all of 2015 to average 2.5%.

In 2015, global economic growth was the weakest since the financial crisis. In December, the Organization for Economic Cooperation and Development (OECD) revised its 2015 world growth estimate downward to 2.9%—well below the historical average of 3.6% per year.

The world oil market continued its dramatic slide. After falling more than 50% in 2014, oil declined another 30% to end 2015 at $37.04 a barrel for West Texas intermediate crude, marking the largest two-year price drop on record.

Markets closely followed the news about China’s declining economic growth and the severe downturn over the summer, when the Chinese equity market declined more than 40% from its peak. Attempts by the Chinese authorities to support stock prices and the Bank of China’s surprise devaluation of the yuan raised questions about China’s impact on the economies of trading partners. The events also pointed to the stresses the government faces in implementing additional free-market reforms and transitioning its economic model from heavy industry and exports to one based more on consumer spending.

In summary, if you’ve read my articles before, you’ll know that I touch on these emotional themes from time to time. That’s why people have advisors because without them, they tend to lose perspective during times of volatility and are driven by their emotions towards decisions that end up hurting them. Sometimes all it takes is a phone call or ten minute conversation to get people back on track mentally for that long term perspective and a worry-free state of mind. But nothing will trump precise planning and academic-based investment management. Those that keep these notions integrated into their life will not worry about their investments (so much).

 

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

Continue Reading

Other articles filed under Austin CFP Team Posts

Tax Considerations Before and After Marriage

November 13, 2017 - This is an excerpt from the WorthPointe e-book A Financial Planning Guide for the LGBT Community by Kermit Johns. This resource is provided as a complimentary resource to aid for the community. Before getting married — remembering your status for...
Continue Reading

Why You Should Pay Attention to Asset Allocation

November 6, 2017 - This is an excerpt from the WorthPointe e-book A Financial Planning Guide for the LGBT Community by Kermit Johns. This resource is provided as a complementary resource to aid for the community. One of the best ways to start the...
Continue Reading

The Morgan Report 2017 Q3 Review: New Market Highs & Investment Strategy

October 18, 2017 - First a quick note, I’m honored to have been selected as a finalist for the San Diego Business Journal’s 2017 Veteran & Military Entrepreneur of the Year Awards. I’m honored to be in the company of some fine men and...
Continue Reading

Mindfulness & Discipline: Essential Ingredients for Successful Investing

October 17, 2017 - I would like you to think about something. What is your biggest roadblock to being free from financial anxiety and uncertainty? You’re experienced. You’re knowledgeable. You have an idea of what you want and you have occasions where you are...
Continue Reading

Morgan Smith Named Finalist for San Diego Veteran and Military Entrepreneur Award

October 8, 2017 - Morgan Smith has been named a finalist for San Diego Business Journal’s Military & Entrepreneur Awards. This new awards program and educational conference will be held at the Hyatt Regency La Jolla at Aventine, 3777 La Jolla Village Drive, on...
Continue Reading

Return to Blog Home