posted on May 3rd 2019 in San Diego CFP Team Posts with 0 Comments /

Step back. What’s the goal of your investment and financial strategy? It should be to land successfully at a given point. But it’s hard to visualize and harder to execute; you might think it’s nearly impossible due to the many variables and risks. I’ve been thinking a lot about this as I speak with investors. How do you build confidence so you’ll have a successful landing decades away, when on any given year it’s not necessarily apparent that things are working for you the way you’d expected. There’s an analogy I think will help: landing an F-14 Tomcat on an aircraft carrier.

Why the F-14 Tomcat? Well, it’s the best fighter jet ever flown, the star of Top Gun (sorry, Tom Cruise) and I happen to have about 150 carrier landings in it. So, I’m partial to it. And, Maverick  is revisiting his fighter pilot exploits filming “Top Gun 2” a few blocks from my house in Coronado at the North Island Naval Air Station. He was seen on a new motorcycle, so I assume the trusted F-14 Tomcat will be replaced by some newfangled fly by wire electric jet.

The key to a successful “Ok 3” wire (the ideal aircraft carrier landing, catching the third arresting cable) is standardizing your approach. You have a relatively large window of error when you’re five miles behind the boat setting up for the overhead break. As you continue the landing process, you can think about successive windows getting smaller and smaller until you very precisely if not brutally smash onto the landing area. If at any time you find yourself outside of one of these windows, or outside the box, you should probably abort the landing, as you most likely won’t be successful.

For each successive window getting closer to the landing area the F-14 NATOPS (Naval Air Training And Operating Procedures Standardization — the bible for naval aviators) defines the parameters you should expect to achieve throughout the landing process. Call me if you want more details on some of the technical terms, such as:  

> Aft of the boat coming into the break: “Wing sweep 68 degrees, 300 – 350 knots indicated airspeed (KIAS), 800 ft. altitude, hook down, SAS on” [confession: we usually came in faster because, well, we could.]

> At the break: “Break interval 15 –17 seconds, 45 to 60 degree bank angle, speed brake extended, throttles idle, level turn at 800 ft.

> Turn to downwind and downind: “Wing sweep 20 degrees, landing gear down below 280 KIAS, flaps/slats extended below 225 KIAS, DLC selected, on speed at 15 units angle of attack (AOA), landing checklist, 600 ft. altitude, cross check gross weight/AOA, commence base turn at 1.1 to 1.2 miles abeam landing area

> Base turn: 450 to 500 feet

> Final approach: “Intercept glide slope approximately 3⁄4 of a mile on speed, call the ball with fuel state and type of approach; example: ‘Tomcat ball 5000 lbs full stop’”

The point here is that you don’t just go in with your hair on fire hoping for the best. There are standardized procedures to increase the probability of consistent successful landings.

You can visualize it like this, where the parameters above define each window going from left to right and getting more precise until you land.

 

 

 

 

 

 

 

 

It just so happens there can be a similar effect when investing. In any given year, you can have a lot of variability, which is to be expected, but it’s also sometimes disconcerting to investors. What they don’t often realize is that history shows us that the longer you’ve been invested, the lower the variability of outcomes can be. In other words, history can show us that the longer you are invested, there is a higher probability that you will hit your investment target, or landing zone, if you’re invested properly.

With well defined investment parameters and time, history shows that even your lowest expected investment return scenarios might still offer up a nice landing. If someone tells you your investment performance over a shorter time frame is any indication of how your future will look, I would recommend you abort that approach and find another pilot. What’s  important in the near term is how your investments are structured, not how they perform. Early on, you can expect to have a pretty big window for your investments to move in. What I can tell you is that if allocated properly, history has shown us that you can have a higher probability of hitting your performance expectations the longer you are invested. On any given year, you might hit some significant turbulence, but if you don’t let that pull your eye off the ball, you should achieve your ultimate goal: a precision landing.

To wrap this up, I’d be remiss if I did not indulge in a Top Gun best quotes mashup relevant to my discussion. Here we go.

There will be periods in your investment experience where things might seem boring or just not working right; you’ll feel the need for speed and  buzz the tower by trying to time the market, but you’ll most likely find your ego is writing checks your portfolio can’t cash. Investing should be a walk in the park and I could tell you how to do it, but it’s classified. However, I would be happy to be your financial wingman anytime.

2019 Q1 Index Review : Index Returns Through March 30 2019

 

 

 

 

 

Table disclosures and

(http://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 © Published and maintained by FTSE Russell, a subsidiary of the London Stock Exchange Group,, all rights reserved.www.ftse.com  The S&P data are provided by Standard & Poor’s Index Services Group.  www.spdji.com MSCI data copyright © MSCI 2013, all rights reserved. www.msci.com. Barclays Capital data provided by Barclays Bank PLC.  www.bloombergindices.com.

 

The first quarter of 2019 was excellent for indexes. Most stock indexes were in the double digits just for the quarter with US REIT’s leading the way at 15.77%, followed closely by the Russell 2000 at 14.58%. This went a long way in making up for the less than stellar returns for the last quarter of 2018. And a nice change for those of you who recognize the long-term benefits of small cap exposure, the Russell 2000 (small) beat the S&P 500 (large) for the quarter.

Even emerging and international (EAFE) markets performed well in Q1 despite the fact that they are still down for the “1 Year” period. This is not rationale for getting out of international markets, rather it’s a good time to remind you that today’s out-of-favor index will most likely be tomorrow’s in-favor index. Since you can’t predict how, when and why these cycles will occur, it is highly recommended that you don’t go chasing them. The big picture painted by the longer term periods is that anyone who has been invested for at least three years and beyond should have a healthy positive return.

Even the bond indexes provided healthy returns for the quarter, ranging from 2.1% to 2.94%. Interest rates decreased in the US Treasury fixed income market during the first quarter. The yield on the 5-year Treasury note declined 28 basis points (bps), ending at 2.23%. The yield on the 10-year Treasury note decreased 28 bps to 2.41%. The 30-year Treasury bond yield fell 21 bps to finish at 2.81%.

On the short end of the curve, the 1-month T-bill yield was relatively unchanged at 2.43%, while the 1-year T-bill yield dipped 23 bps to 2.40%. The 2-year Treasury note finished at 2.27% after a 21 bps decrease.

In terms of total returns, short-term corporate bonds gained 1.83%. Intermediate-term corporate bonds had a total return of 3.82%.

Total returns for short-term municipal bonds were 1.33%, while intermediate munis gained 2.78%. Revenue bonds outperformed general obligation bonds.

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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