In the piece, he contends that one shouldn’t get too worked up about having 33% in seven companies. He’s referring to the Standard & Poor’s 500 index (S&P 500), an index that I think is the world’s most-benchmarked-to benchmark, which has about a one-third allocation to the so-called Magnificent Seven (Mag 7), Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

He points out that on June 1, 1932, 12.7% of the value of the entire U.S. stock market consisted of just AT&T. Today, the largest of the Mag 7, Nvidia, accounts for just 7.8% of the market value of the S&P 500 and 6.9% of the total U.S. market.

His cursory recap of the arguments against indexing or passive investing goes like this.

• In the 1970s and 1980s, tracking the market with low-cost index funds instead of hiring an expensive stock picker was “settling for average.”
• In the 1990s, brokers called index funds “tax bombs” that would supposedly hit investors with huge, unexpected tax bills. Then came warnings that index funds couldn’t protect you against market crashes. More recently, stock pickers touted their unique abilities to pick socially responsible companies. (Never mind.)
• “Concentration risk” is the newest in this long line of marketing blitzes.

Work as an advisor long enough, and you’ll realize that “investors need to be wary of messages about markets that are really about marketing.” He then includes this quote:

“The investment community has always agreed on all these tribal ‘truths’ that have no basis in data,” says Tim Atwill, a former senior analyst at Russell Investments and ex-head of investment strategy at Parametric Portfolio Associates

So should you bail out of your S&P 500 or other index funds?

No way.

That’s the conclusion of recent research by Mark Kritzman, chief executive of Windham Capital Management, and David Turkington, head of State Street Associates, both based in Cambridge, Mass.

After all, by definition, concentration goes up whenever winning stocks keep winning.

“Taking risk off the table every time the market gets more concentrated would have been very harmful historically,” Kritzman tells me. “It may help you avoid some fraction of the selloffs, but you incur a huge opportunity cost in losing out on the run-ups.”

He goes on to point out that larger companies are generally more diversified economically, geographically, and in their businesses; “the larger stocks are just safer,” says Kritzman.

What’s more, while we use the S&P 500 in portfolios, it usually comprises about 48% of an equity portfolio or segment. So, in a 60% stock/40% bond portfolio, the Mag 7 represent less than 10% of the portfolio (48% x 60% x 33%). When I used to work in a Trust Company setting, we would ask clients to sign exculpatory letters when one holding exceeded 20% of a portfolio, more than twice what Nvidia comprises presently.

It seems like, for now, this is an issue to be aware of but not overreact to.

The post The Big Scary Myth Stalking the Stock Market appeared first on Strategence Capital.

The New York Times recently published the story, “Want to Know Where the Market Is Going? Don’t Trust This, or Any, Forecast.” It’s behind a paywall, but if you have a subscription, you can access it here. It has some great takeaways, and I have used an AI tool to summarize those for me and which I have edited. 

Wall Street forecasts are worthless: Since December 31, 2000, Wall Street analysts have predicted gains every year, but the market fell in 7 of 25 years (28% of the time). The 2022 forecast illustrates this perfectly—strategists predicted a 3.9% gain, but the S&P 500 fell 19.4%, a miss of 23.3 percentage points. The 2008 crash saw a 38.5% decline that forecasters failed to predict. Average forecast error: 14.1 percentage points annually—more than 50% larger than the forecast itself.

Misleading averages: While the average annual forecast of 8.9% price gains seems close to the actual 7.7% annual performance, this masks terrible accuracy. The forecasters were positive in all down years and consistently underestimated the good years, making their predictions essentially useless.

Why forecasters are always bullish: Negative predictions hurt business. If brokers told clients the market would decline, people wouldn’t trade stocks and bonds. The firms make elaborate and compelling presentations that create an illusion of clairvoyance.

The author’s forecast: The author of the article, Jeff Sommer, who writes on markets and the economy, for fun, predicts a 16% decline in 2026 but with “no pretense of accuracy whatsoever.” Not a single strategist is predicting a decline in 2026.

Reasons for both optimism and pessimism: The article notes legitimate concerns including tariffs, high share valuations, and AI euphoria. But there are also positive factors like market momentum and strong corporate earnings. The point: no one knows which will dominate.

Historical precedent from famous forecasters: Byron Wien and Laszlo Birinyi, both prominent strategists who died in 2023, completely missed the 2008 crash. When questioned, Wien admitted he had no ability to foresee the future—he just wanted to be “interesting.” Birinyi said his predictions were merely “arguments” for people to evaluate themselves, not actual forecasts.

Here is the author’s advice: 

• Ignore all forecasts completely, but invest anyway for the long term 
• Use low-cost, well-diversified index funds 
• Hold appropriate high-quality bonds for safety 
• The economy typically grows over the long run, rewarding patient investors in profitable companies 
• If retired or with a short time horizon, emphasize bonds and drastically reduce or eliminate stock exposure 

Bottom line: The author compares Wall Street forecasts to his tennis serve—sometimes too long, sometimes too short, technically “perfect on average” but actually terrible. Market predictions are theater designed to generate trading activity, not useful investment guidance.

The post It’s Time for the Annual Forecasting Folly appeared first on Strategence Capital.

This is finally an article that investors can read and be rid of their bad investment habits. This article lists 12 lessons, and I will highlight several, but here they all are.

• Lesson 1: No One Is Very Good at Consistently Getting Market Forecasts Right
• Lesson 2: Perhaps the Magnificent Seven Should Be Called the Magnificent Three
• Lesson 3: Valuations Cannot be Used to Time Markets
• Lesson 4: It Takes Discipline to Stay the Course Through Periods of Poor Performance, as All Risk Assets Go Through Them
• Lesson 5: Assets With Poor Performance Have Self-Healing Mechanisms
• Lesson 6: Even With a Clear Crystal Ball, Markets Are Unpredictable
• Lesson 7: Don’t Let Politics Influence Investment Decisions
• Lesson 8: Most Returns Were Earned Over Short Periods
• Lesson 9: Last Year’s Winners Are Just as Likely to Be This Year’s Dogs
• Lesson 10: Active Management Is a Loser’s Game in Bull or Bear Markets
• Lesson 11: Diversification Is Always Working; Sometimes You Like the Results, and Sometimes You Don’t
• Lesson 12: Great Innovations Are Not Always Great Investments

Let’s now take a careful rant look at a few of these.

Lesson 1: No One Is Very Good at Consistently Getting Market Forecasts Right

It has been said that market forecasters exist to make weather forecasting look respectable. Still, every year, the investment houses and the talking heads on television—I heard it once called Bubblevision for all the bubbles it inflates—insist on providing their market forecasts. Some do it with humility; most don’t. Almost all get it wrong, forgetting the maxim to not mix a forecast with a date: it’s okay to say the Dow Jones Industrial Average will rise to 40,000; it’s a bad idea to say when it will happen. There is a beautiful bar chart along with this lesson in the article. It shows the dispersion between the mediate estimate and what actually happens. Why do you care what the forecasters say?

Lesson 6: Even With a Clear Crystal Ball, Markets Are Unpredictable

I’m just going to copy and paste from the article. Rewind to the end of 2022—or the beginning of 2020—and imagine knowing all that would transpire in the year ahead…

Imagine that on Jan. 1, 2023, you were provided with a crystal ball that would enable you to see the major geopolitical and economic events of the coming year. Given what happened, it’s hard to imagine that any investor would have predicted that the S&P 500 would rise 26.4%. And it is likely that many investors would have sold equities given the negative news that was coming. 

The lesson is that even if you could accurately predict events, you should not try to time markets based on forecasts.

Lesson 7: Don’t Let Politics Influence Investment Decisions

This is my favorite. No matter what you tell them, investors think the decisions of President of the United States determine what happens with markets. They.Do.Not. Here’s a quote from the article:

The 2012 study, “Political Climate, Optimism, and Investment Decisions,” by Yosef Bonaparte, Alok Kumar, and Jeremy Page, showed that people’s optimism toward both the financial markets and the economy is dynamically influenced by their political affiliation and the existing political climate.

Now, imagine the nervous investor (and I have had discussions with many of them, all of whom were Republicans) who reduced their allocation to equities (or even eliminated them) based on views about the Joe Biden presidency, Democratic control of the Senate, and the exploding budget deficits (among other concerns). While investors who stayed disciplined benefited from the market’s very strong performance, those who panicked and sold not only missed out on that strong performance but persistently faced (and continue to face) the incredibly difficult task of figuring out when it would be safe to invest again. Similarly, I know of many investors with Democratic leanings who were underinvested after President Donald Trump was elected.

Is this you? Stop it! Just stop!

Lesson 8: Most Returns Were Earned Over Short Periods

If you get out of the market for even a short period of time, your long-term results could be terrible. Again, from the article… There were 1,067 months between 1927-2023. The best 97 months returned 100x (times!) the other months. Stay invested!

Lesson 9: Last Year’s Winners Are Just as Likely to Be This Year’s Dogs

Don’t chase winners. Period.

Lesson 10: Active Management Is a Loser’s Game in Bull or Bear Markets

Active management is like the proverbial broken clock that’s right twice a day. Active management’s triumphal return is always just around the corner, always waiting to shine during the next bull market.

To outperform, all an active manager had to do was overweight those big winners. On the other hand, 10 stocks lost at least 32.4% (underperforming the S&P 500 by almost 59 percentage points). To outperform, all an active manager had to do was underweight or avoid these dogs.

This wide dispersion of returns is not at all unusual. Yet, despite the opportunity, year after year in aggregate, active managers persistently fail to outperform.

There, I needed that! Now, get off my porch, you kids!

The aforesaid should not be considered investment advice, but rather the ranting of an investment guy who has seen too many mistakes made because of the unlearned lessons above.

The post Have Investors Learned the “12 Lessons?” I doubt it. appeared first on Strategence Capital.

If there’s any way for you to pay less attention to it, DO IT! The more frequently you look at the stock market and/or your investment accounts, the more likely you are to see losses, and when you see those, your brain spurts out cortisol, the stress hormone. When that happens, the flight/fright part of your brain kicks in. It’s not the thinking part of your brain and doesn’t care about your retirement; it wants relief now.

According to the research firm, Bespoke Investment Group, over the last 30 years, if you had looked at your account every minute, 51.2% of the time, you would have seen a loss. Look at it every four hours, and you would have seen a loss 46.9% of the time. If, however, you had only looked every six months, you would have only seen a negative sign 28.9% of the time. Had you looked at your account an unreasonable once-every-five-years, you would have seen a negative return just 10.9% of the time.

Here is a look at the Standard & Poor’s 500 (S&P 500) over the last 12 months. It’s been choppy and there’s been plenty to worry about.

Here’s the same chart with a 200-day (one-year of trading days) moving average (in orange) overlaid. It shows, at any point, what the S&P 500 has done over the last year. That’s a lot more soothing line and, other than the flattening of it, recently, has little to concern an investor.

Here is the S&P 500 over the last ten years. From end-to-end, it looks good, but there were some jaw-dropping declines along the way—plenty of reasons to sell.

Now, here is the last ten years with a five-year moving average overlaid (in orange.) If you’re tracking it, you might think, like Alfred E. Neuman, from Mad Magazine, “what, me worry?”

As another way to think about this, consider your home. It’s not reappraised every day, week, month or year, and chances are you aren’t fretting about whether it’s more valuable today than it was yesterday or last week.  Any price movements only show up when it’s time to put your home on the market. If your home were part of the stock market, it would be like a guy who drives by every day and yells a different price for your home. Would you care?

So do yourself a favor: don’t log on to your account to look at your account’s value today. Instead, spend some time on the Good News Network site or go listen to some birds or download the Seek app and go identify some wildlife.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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One example of a time horizon would be saving for a child’s college education. If the child is four years old and might attend college at age 18, the time horizon is 14 years. Time horizon is so important that we’re required to review it annually with all our clients; it’s one of the most important factors behind an investment decision. It’s the reason that age-based investment products have different asset allocations, depending on the age-group targeted for the product.

Briefly, the shorter one’s investment time horizon, the less volatile those investment should be. Vice versa, the longer one’s horizon, the more volatile the investments can be.

The chart below, using data back to 1928, was produced by Bespoke. It shows the percentage of time that total returns for the Standard & Poor’s 500, a widely-followed measure of stock market returns, have been positive over various time frames. Total return includes not only price appreciation/depreciation but also dividends.

Now we can use that data to think about whether one should invest in stocks, as represented by the S&P 500.

• If you have money to invest for one month, there’s a 37.2% you’ll suffer a loss;
• If you have one decade to invest, there’s only a 5.8% chance you’ll suffer a loss;
• And there’s never been a 20-year period where the total return has been negative.

You can look at these percentages from the other side, too. Over a six-month period, your chance of having a positive return is 70%. That’s not bad. That means that out of ten six-month periods, seven will be positive, but what will your six-month period look like? That’s the big question. I like the odds at five years a lot better. That seems to me to be a good horizon to be thinking about owning stock, but your situation may be different.

Do you wonder if your asset allocation is in keeping with your time horizon? Give us a call or shoot us an email. We’d be happy to discuss this with you.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.

The post The Importance of Time appeared first on Strategence Capital.

It’s pretty much inevitable that when markets become volatile, some clients will want to sit things out for a while by selling the investments that are causing the most pain. They usually say something about getting back in when things look better; the poetic might say something like “after the storm has passed.” Some might think they will buy back in after the market declines further—you know, sell high, buy low. There are a couple of problems with these strategies.

First, the second strategy almost by definition requires one to get back in when the news is worse, after all, that’s what made the prices lower. I think they imagine it playing out how I’ve described in my artwork to the right. But the news at the bottom is always dreadful.

The investor who decides to wait until the news starts to reflect better news will likely have to wait a long time, at which point, prices will have already risen to reflect the good news, as can be seen in the chart below from Vanguard. You can see the full-blown piece here.

We think the best approach is to choose an asset allocation likely to help you reach your financial goals and stick to it, rebalancing only as necessary.

If you’re looking for more advice as we navigate this current environment, check out this recent post.  As always, we are available to field your questions and concerns.

The post Get Out Now; Get Back in Later? appeared first on Strategence Capital.

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Last week confirmed that we’re now traveling together through the third once-in-a-century market event in the 21st century’s first two decades.  On Monday the Standard & Poor’s 500 index tumbled 12%, breaking through the now-familiar stock exchange circuit breakers.  Traders have, for a long time, called Tuesdays Turnaround Tuesday, and last Tuesday, March 17,  brought a ray of hope as the index gained 6%.  In any other market environment, this would be considered a remarkable one-day gain.

Then the roof caved in again.

Wednesday saw the S&P 500 drop 5.18%, followed by a small 0.47% gain, and then, on Friday, another 4.34% loss.  Just a month ago, the index was recording all-time highs.  Now we have experienced two of the worst market weeks since 2008.  And this week didn’t start on a positive note.

The reason that traders are running for the exits is, of course, the unpredictable course of the COVID-19 crisis.  You don’t have to be told how our social distancing lockdown is disrupting economic activity.  This is almost certainly the first time anyone in the X, Y, Z and Baby Boom generations has seen empty grocery aisles (flour, anyone?), shuttered restaurants and theaters, and empty corporate offices as people in all walks of life are told to work from home.  You can see the progress of the virus in various countries in the chart below.

You can view the real time movements of the disease in various dimensions on the fascinating Johns Hopkins and Medicine Coronavirus Resource Center website. There’s even a case in Greenland. (Do people even live there, where the country’s name is a marketing scheme?)

The bottom line is that the number of cases is still increasing dramatically, despite a near-lockdown of our society. What I haven’t seen reported in many places is the number of recoveries (100,885 as of yesterday; higher when you read this), which the Johns Hopkins site shows prominently on its homepage. It’s a little bit of good news that gets neglected in reporting how bad things are.

The federal government has not been completely inactive during the crisis.

You already know that the Federal Reserve Board has dropped its rates to near zero in order to make it easier for banks to lend money to corporations.  More recently the Fed has pledged to reinstate its Quantitative Easing program, which means (for now) buying at least $500 billion of Treasury bonds and $200 billion of mortgage-backed securities.  This can be seen as an attempt to drive down interest rates and inject liquidity into the financial system. The Fed has said that, in essence, it will do whatever it takes. That’s the monetary policy side.

Since monetary policy is often like pushing on a string (do I really need a new loan?), what we’re waiting for now is fiscal policy, the government spending side of things. This could include policies like sending checks to every household or it could include programs that might strengthen our nation for the future, like a massive health care project. As of this writing, Congress is working on something that both sides of the aisle can agree on.

Meanwhile, the Internal Revenue Service has scrambled to provide relief of its own, extending the date that people have to file their tax returns from April 15 to July 15.  The deadline for making contributions to an IRA, Roth IRA and Health Savings Account have also been extended to July 15, but right now nobody seems to know whether people filing for an extension will have to file six months from April 15 or July 15.

Another area of confusion: people who are required to make quarterly estimated payments have seen their April 15 due date extended to July 15, but the second quarter estimated payment is still, as of this this writing, due on June 15.

Are there any strategies to deal with situations like this?

If you have a year’s worth of your expenses set aside in cash, then you have the means to simply live out the downturn without locking in the losses the market has already delivered or new ones that may arise when the second quarter GDP numbers come in negative and the economists declare a recession.

While the cause is always different, in the past, markets have always recovered and gone on to new highs.  Moreover, companies are almost certainly not 30% less valuable today than they were in January, no matter what the market valuations are trying to tell us. If you must get out of investments, please, please, please, have a plan to get back in. To paraphrase Hans and Franz, from Saturday Night Live, “listen to me now; hear me later.”

The only time it will feel good enough to get back in is after markets have risen. You will miss out on part of the recovery.

LPL Financial, our broker-dealer, recently put out its “Road to Recovery Playbook,” which laid out some signals that might indicate the market is done declining. They are listed to the left, along with their current status.

More importantly, self-quarantining, working from home, avoiding physical contact with others and social distancing are clearly the best strategies to mitigate this epidemic, even if they are sometimes challenging.  Remember that something more important than money is at stake here: peoples’ lives, and the hospital system’s operational capacity.

Just as important is keeping your sanity.

Hard as it might be in these incredibly stressful times, recognize that, just like the plagues that ravaged the world in days of old, this one will pass.  Our hope is that you will take time to walk outside—with an appropriate distance from others—and look for ways to find joy every day.

Someday, it will be a remarkable story to tell your children or grandchildren, who will marvel at how tough we were that we could move ahead with our lives in difficult circumstances.  Please accept our prayers, best wishes, and help if and when you need it.

The post Where We Are Now appeared first on Strategence Capital.

Initially, it looked like 2019 was going to be a good year to put the saying into action, as witnessed by this chart of the Standard & Poor’s 500 index from January 1 through May 31.

Instead, markets turned on a dime and once again made a lot of people look silly, which they tend to do often.

Be careful in blindly applying Wall Street sayings. That they have worked over long periods of time means that you need to apply them over long periods of time.  In short periods of time that can be painful.

For more thoughtful ways to invest, get in touch with us.

The post [Don’t Necessarily] Sell in May and Go Away appeared first on Strategence Capital.

In my previous job, I was managing an investment portfolio for a high net worth client. In the city where I worked, the client’s name and/or his enterprises would have been well known. He was a tremendously -successful entrepreneur.

On June 29, 2011, he called me to tell me that he wanted to sell everything—all of his publicly-traded securities. I reminded him that he owned a diversified portfolio, that maybe we should just sell what seemed to be the riskiest securities. Nothing doing; sell everything!

Brilliant!

His timing wasn’t quite perfect; he gave up some upside, assuming his portfolio resembled the Dow Jones Industrial Average index (DJIA), which is shown here. But by August 5 of that year—barely a month later—the U.S. debt had been downgraded by rating agency Standard & Poor’s, and a few days later, the DJIA lost 16% of its value.

One problem with market timing, however, is that for it to be successful, one has to make two right decisions, the proverbial buy low/sell high or vice versa. And, unfortunately, my guy only got half the process right.

Oops!

Here’s a look at the DJIA, starting at the end of the chart, above, and ending when I said “so long” to that firm. On the day I left, he still had not gotten back into his investments. His account remained invested in a money market fund. He expected another shoe to drop.

So, what if you knew a market you were invested in would drop by 16%? Let’s further say you knew it would drop by 16% in a given calendar year; would you get out, not knowing when it would rebound? You might be suffering from Hindsight Bias about right now, as you’re sure you would’ve gotten—or would get—back in at some point below where you sold.

What 16% drop?

Here’s a look at that 2011 drop highlighted in an unrealistically-long investment horizon. It’s almost imperceptible—it’s no Burst Internet Bubble or Financial Crisis.

This chart is shown with a logarithmic scale, which means that equal distance on the chart represents the same percentage change. Whatever the size of the device on which you’re viewing this chart—smartphone, desktop computer—a given vertical measurement…1/2”, 1”…represents the same percentage change at any point in the chart. I mention that because while it gives the blip (red circle, below) the appropriate non­-impact, it doesn’t reflect the dramatic opportunity cost of being out of the market. The DJIA was 86% higher from June 29, 2011 through March 31, 2014. Missing an increase like that can put a serious dent in one’s financial plan.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.

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