posted on January 17th 2019 in WorthPointe News with 0 Comments /

Red lifeguard truck at the beach

I had a conversation recently with a client of mine (we’ll call him Tom) who was worried about the recent volatility in the markets. I’d like to share its essence to help you gain perspective of the dangers you as an investor can often bring to the prospects of your long-term financial success.

This particular client is a retired lifeguard and a true waterman. He has won the 32-mile Catalina Channel paddle race and the Medal of Valor as a lifeguard, and is an excellent surfer, husband, and father. Olivian Pitis from Dimensional Fund Advisors was on the call with us and was very interested in his background. Olivian asked him about his experience and noted that people who aren’t fully engaged with the ocean on a daily basis will probably be fearful of all the possible dangers — the waves, rocks, riptides, sharks, and even their lack of swimming expertise — or they might look out and see nothing much, getting overconfident when they should be aware of dangers they just can’t see.

In contrast, the experience and knowledge gained from daily involvement with the ocean over decades and continued training with a team give lifeguards like Tom a unique perspective. He will see things the novice will not. He will recognize people who are panicking for no reason other than not being able to control their emotions, which, if they’re fortunate, will end up in a rescue.

The pivot to financial decisions is obvious. There’s more than ample evidence that investors who aren’t involved daily with long-term strategic investment planning have a hard time seeing the same things that may be  obvious to those who are. Investors often see extreme danger in financial scenarios and label them as absolutely unique game changers when they may not be. The recent triggers du jour are President Trump, the China trade war, inflation and interest rates.

Once identified, people often focus only on these issues, which are usually reinforced by a media that’s in the business of pitching one crisis after another. Yes, there are issues out there and there always have been and will be. But putting blinders onto your particular investment triggers can be a financially damaging way to live.

If you focus on your personal triggers, you might be tempted to cash out at certain times and then get back in the market at certain times. The problem with getting in and out of the market is that it requires perfect timing and predicting for buys and sells. And you would have to be successful doing this over decades. Many people try this, often with disastrous results to long-term wealth.

A typical story is hearing people boasting about getting out of the market before a downturn. But that’s only half the battle. They usually don’t end up telling you when they bought back into the market because they missed the recovery. But they still feel good. Should they? No. Missing a recovery that usually occurs when we least expect it is one of the most damaging behaviors for market timers. Let’s look at how much missing the best days in the market can hurt you financially.

Chart of Reacting Can Hurt Performance

In U.S. dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Performance data for January 1970 – August 2008 provided by CRSP; performance data for September 2008 – December 2015 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. U.S. bonds and bills data © Stocks, Bonds, Bills, and Inflation YearbookTM, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Occasionally, though, people get it right. Since we know no one can predict the future, that must be considered luck. Of course, if you get it right once or even several times, you might label this as skill, when in actuality we know it as Hindsight Bias or the “knew-it-all-along” effect. It’s the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.

So, you might have had a good result in the past with market timing or stock picking and chalk it up to skill, but unfortunately it’s most likely luck. And as we know, luck is not a strategy. The key takeaway is that making a bad decision with good results can be more harmful than making a good decision with bad results. Why? Because over time, bad decisions will catch up with you. And my role as financial advisor is to emphasize good decision-making, even during times when the positive future results of those decisions are hard to see.

It’s a sobering thought that someone with a calm, informed, and experienced perspective can survive and thrive in the ocean where many others will drown. Being a surfer and waterman in the ocean for decades, I’ve unfortunately been around numerous drownings. Here’s to our lifeguards keeping us safe.

It’s also a sobering thought that someone with a calm, informed, and experienced perspective can survive and thrive in the financial markets where many others will drown. Being a financial advisor for 15 years, I’ve unfortunately been around numerous drownings. Here’s to our financial advisors keeping us safe.

2018 Q4 Index Review

WorthPointe 2018 Q1 Index Review

Table disclosures and ( 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 © Published and maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group,, all rights  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.

For those of you who were focused on life and not the financial markets in 2018 — good for you. Having said that, it was probably not too hard to hear about the increase in volatility and downturn for equities in the 4th quarter. Just for the 4th quarter, the Russell 2000 (small stocks) was down 20.20% and down 11.01% for the year. The S&P 500 was down 13.52% for the quarter and down 4.38% for the year. As a matter of fact, all the listed stock indexes were negative for the year.

All of this might seem rather extraordinary and you might be tempted to re-evaluate your faith in the stock market or your investment plan. But in reality, this has been a pretty tame correction compared to the worst years we’ve seen. The following table compares selected 2018 index returns with their worst post-depression year — incidentally all occurring in 2008.

Chart worst year: DFA Matrix Book 2018

Source for worst year: DFA Matrix Book 2018

As can be seen in this table, none of the indexes came close to approaching their worst year. It’s important to understand that corrections like this are expected and healthy and should have no bearing on your overall long-term investment strategy. We should also remember that the markets have essentially been experiencing a robust expansion since 2008 as reflected in the 10-year index returns. The caveat is of course that you have planned accordingly with your stock/bond allocation based on your cash flow needs. If you have no plans to tap your portfolio for income for about 10 years, then you really need not bat an eye. If you are or do have plans in the near future to tap your portfolio for income, then a bond allocation consideration is important.

Bonds actually fared well for the quarter, with all selected bond indexes being positive and only one (Global Aggregate Bond Index) down for the year at -1.20%.

So here’s some more perspective for you if your triggers are firing. The economy appears to be healthy. The Philadelphia Federal Reserve Bank recently published its Fourth Quarter 2018 Survey of Professional Forecasters. In summary, GDP is expected to grow 2.4% to 2.6% over the next couple quarters and it predicts higher real output growth in 2020 and 2021. Unemployment has been down to its lowest rate in 50 years and is projected to stay in the 3.7% to 4.0% range for the next three years and it has revised upward its predictions on job gains. Inflation projections are holding steady with Core CPI inflation projected at 2.4% over the next couple years. Finally, forecasters have revised downward the chance of a contraction in real GDP in any of the next four quarters.

It’s clear that Fed policy is front and center, and the recent softening of its tone has already helped bring further positive light into the financial landscape.

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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