The pace with which the Coronavirus bear toppled the longest-running bull market in history was startling. The Dow Jones Industrial Average officially entered the “Coronavirus bear market” in just 20 trading days, easily making it the fastest such slide in stock market history. The second fastest was 1929 and that took 36 trading days.
Lest we forget: the highest closing record for the DJIA was set on February 12, 2020, when it closed at 29,551.42. Less than one month later, on March 11th, the DJIA closed at 23,553.22, down 20.3% from its high and officially ending the longest-running bull market in history that started in March 2009.
Bear Market Defined
In technical terms, the stock market enters a bear market whenever stock prices have fallen over 20% from their recent peaks. A bull market, on the other hand, is when stock prices rise by at least 20%. There is debate as to where the true origins of these expressions came from, but many suggest that it has to do with how each animal attacks: a bull thrusts its horns and enemies upward whereas a bear swipes its paws and enemies downward. Neither sound pleasant.
In fact, an examination of the historical performance of the S&P 500 from 1926 through March 2020 shows that:
The silver lining is that bear markets are shorter than bull markets.
Stock Market Corrections & Crashes
It is important to distinguish a bear market from a market correction, which is shorter and involves less of a market decline. Market corrections are short-term trends that typically last less than a few months and involve stock market declines of at least 10% – but not as severe as the 20% fall of a bear market.
Stock market crashes, by contrast, are when stock markets plummet by more than 10% in a single day. The Great Crash of 1929 consisted of market drops of 13% and 12% on successive days. The stock market crash of October 19, 1987 – known as Black Monday – saw the market drop 23%. And on March 16, 2020, the market crashed when it dropped 13%.
Historical Bear Markets Between 1926 and March 2020
There have been eight bear markets, ranging in length from about 6 – 24 months and bringing market declines ranging from more than -80% to just over -20%.
Here are the more memorable bear markets.
The upside of a Bear Market
The one great thing about Bear Markets, is they end. And almost more importantly they make way for a new Bull Market.
Consider the rallies that occurred during a few of the past bear markets:
Thoughts for Investors
The question is, should the average investor remain invested when a bear market starts swiping its paws and everything downward? While the answer to that question depends on the individual investor, it is important to beware of the tendency to over-react to fears of a bear market or thrills of a bull market. Often times, individual investors tend to let their emotions adjust their holdings, which can result in selling after prices have fallen sharply, instead of buying at low prices (or buying after stocks have risen to unsustainable heights). Whether you will be able to out-wait the Coronavirus bear market and rebuild your portfolio to your satisfaction depends upon a deluge of factors, including the duration of the Coronavirus bear, your risk tolerance, your time to invest, the strength of your investments and the choices you make going forward.
What's the difference between these two S&P 500 index funds?
They both track the same index.
They invest in exactly the same companies.
They both are passively managed.
So what might cause their dramatic difference in performance over the last decade?
Simply, the amount of money they charge investors. The industry calls this fee their "expense ratio."
If you had invested $100,000 in the most expensive S&P 500 index fund 10-years ago vs. the investing in one of the lowest cost S&P 500 index fund 10-years ago, you'd have $60,000 less. Let that sink in. $60,000 LESS.
Again, these funds invest in the exact same companies. You simply paid more money for investing in the exact same companies, and in the end, the fund company kept more money and you earned less.
Many investors and for that matter many Financial Advisors don't understand what they are actually investing in when they pick a particular investment fund. Many unsuspecting investors look at the name of the fund, do a quick glance at the historical performance and hit the "buy" button without fully vetting what the fund is actually invested in. For many investors the process I just laid out is what they call "research", but in truth it's nothing more than window shopping.
Take a look at the chart below of a fund that claims to be a "Low Volatility" fund...meaning, the goal of this fund is to be LESS risky than the market. This didn't work out so well for this fund and its investors. This particular fund has been actually MORE risky.
Deep due diligence is required of all investments that are under consideration to be put into a portfolio to adequately understand the risks and the potential returns. Looking beyond the name of the investment is just the first step.
Depending on the time frame you are referencing, the Stock Market return has been great, horrible or something in between. It's important to understand, time can be considered a diversifier similar to diversifying across different assets and securities. Being invested across many different types of securities and across several asset classes is akin to using time to reduce risk, risk goes down with time.
It's important to keep Stock Market returns and Time in perspective.
In less than a month the Stock Market is up over 27% from the recent bottom.
Over the last 3 months the Stock Market is down about -13%
Over the last year the Stock Market is essentially flat.
The Stock Market is up almost 50% in the last 5 years.
In 10 years the Stock Market is up over 190%.
“The worst thing mistake you can make in investing is to buy or sell based on current headlines.” - Warren Buffett
During these challenging times, it's actually a great opportunity to review your Retirement Portfolio and your overall Financial Plan. There are some amazing opportunities to take advantage of what the market is providing long-term investors. With more people working from home right now, you might have some extra time to dig up a recent statement and make sure you are on track to meet your financial goals. Here are 8 quick ideas to help improve your Retirement Portfolio.
1. Have Clear Investment Goals
The adage, “If you don’t know where you are going, you will probably end up somewhere else,” is as true of investing as anything else. Everything from the investment plan, to the strategies used, the portfolio design, and even the individual securities can be configured with your life objectives in mind. Avoid focusing on the latest investment fad or on maximizing short-term investment return, instead design an investment portfolio that has a high probability of achieving your long-term investment objectives.
2. Focus on the Right Kind of Performance
There are two timeframes that are important to keep in mind: the short-term and everything else. If you are a long-term investor, speculating on performance in the short-term can be a recipe for disaster because it can make you second guess your strategy and motivate short-term portfolio modifications. But looking past near term chatter to the factors that drive long-term performance is paramount. If you find yourself looking short-term, refocus.
The only way to create a portfolio that has the potential to provide appropriate levels of return and risk in various market scenarios is adequate diversification. Often investors think they can maximize returns by taking a large investment exposure in one security or sector. But when the market moves against such a concentrated position, it can be disastrous.
4. Know What You Own
Far too many investors don’t know what they are invested in. Not knowing what the specific risks of the investment are and not understanding how it does or doesn’t fit into their portfolio. Every investment should have a reason why it’s in your portfolio. Ensure that every investment in your portfolio has a reason to be there.
5. Control What You Can
No one can predict the future, but you can take action to shape it! Similarly, you can’t control what the market will do, but you can control how you react to it. Right now the market is offering some great opportunities, use the market’s volatility to your advantage.
6. Reduce Your Media Consumption
There are plenty of 24-hour news channels that make money by showing “tradable” information. The key is to parse valuable information out of all the noise. Successful and seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis. Using the news as a sole source of investment analysis is a common investor mistake because by the time the information has become public, it has already been factored into market pricing. A focus on near-term returns leads to investing in the latest investment craze or fad or investing in the assets or investment strategies that were effective in the near past. Either way, once an investment has become popular and gained the public’s attention, it becomes more difficult to have an edge in determining its value.
7. Don’t Try to be a Market Timing Genius
Market timing is next to impossible. For people who are not well trained, trying to make a well-timed call can be their undoing. An investor that was out of the market during the top 10 trading days for the S&P 500 Index from 1993 to 2013 would have achieved a 5.4% annualized return instead of 9.2% by staying invested. This difference suggests that you are better off contributing consistently to your investment portfolio rather than trying to trade in and out in an attempt to time the market.
8. Review Investments & Rebalance
If you are invested in a diversified portfolio, there is an excellent chance that some things will go up while others go down. At the end of a quarter or a year, the portfolio you built with careful planning will start to look quite different. Check in regularly and rebalance to make sure that your investments still make sense for your situation.
Download the 1-page PDF below
When weather forecasts are inaccurate, we can usually change our plans with little consequence in the greater scheme of things. While making financial decisions does involve some guesswork, an educated guess—even with elements of uncertainty—sometimes can be better than making a decision with no forecast at all.
Unfortunately, economic forecasting, like weather forecasting, is far from an exact science. Even professional economists may strongly disagree on the direction of the economy at any given point in time, based on their interpretations of conflicting economic indicators. Although many factors are pivotal in assessing the economy, let’s focus on two key points that may help you better understand the economy, and where it may be headed in the near future.
1. Consumer Spending: Since consumer spending has historically accounted for about two-thirds of the economy, according to the U.S. Bureau of Economic Analysis. Consumer cutbacks on spending are not usually the primary cause of a recession. Rather, consumers may buy more on credit, which leads to greater monthly payments. But at some point, consumers can spend only what their incomes will allow. When consumer debt rises, it becomes particularly important because of the impact of total consumer spending on our economy. It may also be helpful to understand the Federal decisions that lay the foundation for our overall economic climate.
2. U.S Government (Monetary & Fiscal Policy): The Role of the Federal Reserve Bank (the Fed) Even the casual observer of business news knows that “Fed watching” is a serious activity in the financial and business sectors. You may be wondering, what it is that makes the Fed so important.
While consumers can affect the economy by spending according to their own situations and financial pressures, Federal policy decisions, such as fiscal and monetary measures, also have an effect on the economy. Fiscal policy, enacted by Congress in the form of tax and/or spending legislation, is the result of the political process and the prevailing political climate. In contrast, monetary policy is the responsibility of the Fed, whose role is to evaluate all factors influencing the economy (individual, market, and government) and take action in attempts to keep the economy on an even keel.
The Fed can manipulate the flow of money in order to obtain a desired effect over time. However, the Fed’s most effective short-term policy decisions that can manipulate the economy involve short-term interest rates. Consequently, the Fed can realistically have only one target: inflation. If the Fed perceives that prevailing forces will increase inflation, it can attempt to slow the economy by raising short-term interest rates. It does this based on the assumption that an increase in the cost of borrowing is likely to dampen both personal and business spending. Conversely, if the Fed perceives that the economy has slowed too much, it can attempt to stimulate growth by lowering short-term interest rates, the theory being that lower costs for borrowing may stimulate more spending.
The Fed walks a fine line in trying to maintain this balancing act. If it doesn’t tighten the reins soon enough by raising interest rates, it runs the risk of uncontrolled inflation. If it fails to loosen them soon enough by lowering interest rates, the economy could plunge into a recession. An argument could be made that the primary goal of the Fed is to keep inflation low enough that it does not affect business decisions.
You & Your Financial Plan: Your own personal financial plan is really what will drive your success (or failure). By understanding what your goals are, where you are today and having a well-thought out plan to get you from where you are today to where you want to go is ultimately what's important.
Understanding how the markets work, who the participants are, and realizing that many things are unknowable at the time you have to make a decision are extremely important. And it's this last part that is most important, knowing that you won't know everything you'd like to know beforehand is the hardest idea to grapple with. As the well known Nike saying goes, "Just Do It."
Many times when you don't know what to do, it's wise to take advice from people who are experts in their respective fields and have been extremely successful. When things seem unsettled, these 3 savants offer timeless advice for investors.
Such words of wisdom are especially appropriate amid the current turbulent circumstances: Stocks recently hitting lows and experiencing extreme volatility - to say the least. The variables change, but inevitably crises and problems occur and affect markets like they are today. But most importantly we ALWAYS overcome them.
Here’s some food for thought from three great investors to help avoid investment mistakes:
Crises in markets come and go: Shelby M.C. Davis.
A legendary mutual fund manager. Human history is the history of crises and relative periods of calm.
It’s no surprise that markets exhibit the same patterns of exuberance, fear and everything in between. Every crisis seems to have different origins, whether stagflation or inflation, collapsing or soaring energy prices, falling or climbing home prices. A wise investor acknowledges that crises ebb and flow, and that the best investment strategy adjusts to changes but avoids drastic over-reactions.
As Davis puts it: “Crises are painful and difficult, but they are also an inevitable part of any long-term investor’s journey. Investors who bear this in mind may be less likely to react emotionally, more likely to stay the course, and be better positioned to benefit from the long-term growth potential of stocks.”
Don’t let your gut emotions steer investment decisions: Benjamin Graham.
Graham is considered the father of value investing, he taught Warren Buffett and wrote a number of classic books on investing. Graham said: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”
Avoid market timing: Peter Lynch.
He rose to fame by successfully managing the Fidelity Magellan fund from 1977 to 1990, racking up an eye-popping 29% annual rate of return. Sadly, the average investor in his fund during those 13 years earned a small fraction of 29% by jumping in and out of Magellan to try to enhance returns.
Lynch once summed up his dim view of market timing this way: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
Another example of market timing’s weakness: The Standard & Poor’s 500 from 1992 to 2012 registered a nice 8.2% annual return. What kind of return did investors earn if they missed the best 10, 30, 60 or 90 trading days during those two decades, which is about 2,500 trading days?
Investors who missed the best 10 S&P 500 days earned half as much, 4.5% annually those who missed the best 30 days realized zero the best 60 days, negative 5.3% the best 90 days, a whopping minus 9.4%. In other words, stay at a party from start to finish - don’t dart in and out if you don’t like the music or find the conversation boring.
The lessons provided by these three investment sages is that your own mistakes may be a bigger source of your own poor return than economic and political factors that move markets and are beyond your individual control.
I repeat. Do nothing.
Our whole lives we have been told and our own experience shows us by working hard, getting good grades, keeping busy, and pushing forward is almost a sure bet to getting ahead and grabbing the brass ring.
In investing, the opposite is true. Which is why it makes it so hard to do. Doing nothing is almost always the surest way to success. As Warren Buffett says, "The Stock Market is designed to transfer money from the active to the patient."
The best-performing mutual fund in the first decade of the 21st century was the CGM Focus Fund. During the ten years covering two recessions, the fund managed to generate an impressive 18% annualized return. What's even more amazing than this impressive return is that the typical investor in the fund actually lost almost -11% annually.
You read that right, an 18% gain for the fund and an -11% loss to the investor.
Huh? How is this even possible?
Investors were doing exactly the opposite of what they should have been doing; they were buying high and selling low. Investors plowed into the fund when it was high, and when the fund waned a bit, they sold. This is one of the surest ways to go broke.
And the CGM Focus Fund’s shareholders are not alone. Several other studies indicate that equity fund investors underperform across the board, on average, by over 6% per year between 1991 and 2010, according to Davis Advisors.
Why does this happen?
You can blame biology, we are preprogramed to want to "do something" when we are scared. And it made sense tens of thousands of years ago when we had to decide if a large animal might attack us. Quick action made sense, run now and live to hunt another day. This evolutionary response was critical to our survival as a species for thousands of years, unfortunately, our biology hasn't kept up with our current 'survival' needs.
So where does this fear come from today? It comes from the media, so-called 'advisors', friends, family, co-workers, and neighbors. Most unsuccessful investors chase performance, engage in panic selling, and adopt myopic thinking encouraged by watching daily prices.
Successful investors realize that no one can time the market consistently and therefore they ignore all the fear around them. They know the most important thing, is to have a plan, stick to their plan, and when others are selling, they do nothing. Warren Buffett said it best, "Investing is simple, but not easy."
- Paul Rossi
Below is a letter that Warren Buffett penned in THE NEW YORK TIMES during what would become known as the Global Financial Crisis. During these turbulent times, I think it's important to re-read what he wrote, it's sage advice for investors.
By WARREN E. BUFFETT OCT. 16, 2008
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So…I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Over the last 10-years the S&P 500 or what many people refer to as the "Stock Market" is up over 285% when factoring in reinvested dividends (purple line). While it's not mentioned a lot in the news, the dividends paid by these companies has a dramatic impact on investors and their overall return. In the chart above, you'll notice the same index (in orange) shows the index return excluding dividends. The return difference is material. Dividends Matter.
My firm was recently approached by the leading online Real Estate firm Redfin to provide a very short tip that could help potential homebuyers save for a home. Redfin asked myself and several advisors around the country for their advice. Collectively, there is some great advice for would be homebuyers as well as helping give people some financial direction.
Here is the beginning of Redfin's article:
Are you a millennial thinking about settling down and buying your first home? Saving for the 20% down payment can be overwhelming – for many of us, it’s tough to know where to begin! To help ease the burden, we rounded up the financial experts to weigh in with their best tips for millennial homebuyers. From long-term investment strategies to day-to-day saving tips, whether you’re in Sacramento or Philadelphia, here are the best ways to inch toward your first home straight from the experts that know best.
Here is what I wrote for the article on Redfin's website. - In fact it's really two thoughts.
Click here to be directed to the entire Redfin article and all the great advice.
FOR IMMEDIATE RELEASE
Rossi Financial Group Receives 2019 Best of El Dorado Hills Award
El Dorado Hills Award Program Honors the Achievement
EL DORADO HILLS December 23, 2019 -- Rossi Financial Group has been selected for the 2019 Best of El Dorado Hills Award in the Financial Services category by the El Dorado Hills Award Program.
Each year, the El Dorado Hills Award Program identifies companies that we believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and our community. These exceptional companies help make the El Dorado Hills area a great place to live, work and play.
Various sources of information were gathered and analyzed to choose the winners in each category. The 2019 El Dorado Hills Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the El Dorado Hills Award Program and data provided by third parties.
About El Dorado Hills Award Program
The El Dorado Hills Award Program is an annual awards program honoring the achievements and accomplishments of local businesses throughout the El Dorado Hills area. Recognition is given to those companies that have shown the ability to use their best practices and implemented programs to generate competitive advantages and long-term value.
The El Dorado Hills Award Program was established to recognize the best of local businesses in our community. Our organization works exclusively with local business owners, trade groups, professional associations and other business advertising and marketing groups. Our mission is to recognize the small business community's contributions to the U.S. economy.
SOURCE: El Dorado Hills Award Program
El Dorado Hills Award Program
This is a question I hear a lot.
It's difficult to explain the most recent monthly return or year-to-date return and not talk about the long-term average return of the stock market. Many investors have a tough time hanging on during the difficult times to then subsequently reap the rewards during the good years. With all the ups and downs the market provides, it very rarely returns in any single year the long-term market average. Take a look below.
Part of the value of getting professional financial advice is understanding the history of the various investable markets and what you can expect both in terms of volatility and return. A good financial advisor will provide sound financial advice that will stand the test of time both in good times and bad times.
When the financial markets are in turmoil and account balances start to fall, there is a strong temptation to ask your financial advisor to “do something” to stem any perceived losses. Yet it is often the case that staying the course—or doing nothing—proves to be the better path.
Sometimes the hardest thing to do...is to do nothing.
While this advice is well served to those who are properly invested for the long-term, it may not be the correct advice if you are not invested properly or your time horizon doesn't allow for markets to recover. Proper planning is crucial to being able to stay the course when rough weather is approaching or is already hammering your ship. The best time to make any course corrections is long before any corrective action is forced upon you by the market.
Download the 1-page PDF below.
Investing in your future pretty much requires that investors have patience. I know, I know...it's easier said than done.
The historical proof is in the pudding. See the chart(s) below. There has never been a 20-year period where the stock market hasn't had a positive return (although this doesn't guarantee the future will be like the past). While 1-year returns and even 5-year returns have had many periods that have had negative returns. This clearly shows that investors that are willing to accept short-term losses can reasonably expect long-term gains. While very few things in life are guaranteed and investment gains are not one of them, however, there is a high likelihood that you will be successful if you give yourself and your investments enough time.
Planning for retirement, buying a new home, or saving for your child's education are important financial decisions and you can significantly put the odds in your favor of success by ignoring the short-term noise and focusing on the what the long-term can likely provide.
What do I mean when I'm talking about the Big One, well I'm not talking about what you might think. I'm talking about the one big mistake that would dramatically impact your life. The Big One is any event or decision that leads to an outcome that could be considered catastrophic and unrecoverable. In this article, I will be talking about financial related Big Ones, but there are many other Big Ones to avoid, it could be physical, psychological, relational, etc. Statisticians refer to this as avoiding the left tail; what they are referring to is the far-left hand side of a normal bell shape curve. The left side is typically associated with highly improbable or highly unlikely outcomes, but when they do happen, can have a major impact.
Back in the late 1990s I had a friend who worked for a technology company, and if you remember the late 90s, it was a time that saw a lot of people working for technology companies, especially if you lived anywhere in California. The company he worked for was building out several co-location server farms where people could rent the servers to build their companies by not having to buy the servers themselves. My friend, being that he worked for the company, felt that he had a good idea as to the direction his company, the technology, the industry, the people, and overall felt confident about the company’s prospects. So, on top of the company stock options that he was given when he started there, he went out and purchased additional shares in the public market. Needless to say, he was highly concentrated, essentially every dollar he had was tied up in his company. Both his net worth and income were closely connected, therefore if his company did well then it was reasonable to assume that both his income and net worth (net worth = assets – liabilities) would do well. Conversely, the opposite held as well, and by the middle of 2000 with the implosion of the .com bubble my friends outlook dramatically changed as technology companies all over were struggling to survive the shock of the stock market’s drop which would later be called the bursting of the technology bubble. This had a compounding effect on my friend, as the shares he owned dropped and eventually became worthless over a few short months. In addition, he also lost his job which sent him scrambling to find another job at the same time everyone else was looking for a job. It was a 1 – 2 punch that knocked him down and almost out which took him several years to recover. His biggest saving grace was his age, at the time he was in his early thirty’s and had time to recover. Can you imagine if this happened to him later in his career? Without time to recover, what happened to my friend would have been his Big One. The reason I bring this up is that, yes being highly concentrated with your investments does have the opportunity of a huge reward, it also comes with the higher probability of a huge loss. Fortunately for my friend, he was relatively young and had many years to rebuild his asset base. Unfortunately, this isn't the case for people who are toward the end of their career and time is working against them. This event, if it happened to a person a couple of decades older could have been their Big One. Many times, time is the key determinant of whether an event could be considered the Big One.
It is this idea; your advisor's primary job is to prevent you from making this type of mistake in the first place. First the good news, let's start by talking about some of the things that investors can do wrong and recover from, which fortunately are quite a few. Investors can fail to rebalance, they can own sub-optimal investments, they can be somewhat tax inefficient, they can overpay on a mortgage, just to name a few. These are all mistakes, while definitely not ideal, people can survive and might still be able to reach their goals. Many times, if the financial advisor can just keep their client from making the big mistake, they've earned every penny you pay them.
While comprehensive financial planning encompasses many things, which include things like retirement planning, investment selection, asset allocation, portfolio management, college education planning, Social Security optimization, Medicare, tax planning, estate planning, risk management and insurance, one of the most important ideas is to prevent the Big One from happening. The idea is making sure that the decisions that are being made today will not wipe a person or a family out. People can come back from many sorts of small mistakes, but it's those big critical life altering decisions that you must have a zero-tolerance threshold.
It can be thought of similarly as the idea in the aviation industry where anything deemed critical, has checklists and redundancies built in. The check-lists help avoid the problems in the first place by having a system in place to make sure pilots are following standard procedures. These checklists are continually updated and improved to reflect new information and data as it becomes available. This process has proven to keep passengers safe and make air travel one of the safest forms of transportation. The redundancy aspect is about having all critical systems backed up just in case the original system fails the secondary system can take over. This multi-level system builds on the idea of an industry that strives for zero-tolerance failure. This type of process and zero-tolerance of failure is exactly what is needed in your financial life. Having initial plans, contingency plans, check-lists, etc., all in the name of making sure you never get blinded-sided by the Big One.
The challenge is that many clients may not realize it, but they need their advisor to be a barrier between themselves and a bad decision. How much is avoiding the Big One worth? How much is it worth in terms of stress, in terms of money, in terms of physical health, in terms of mental health, and in terms of relationships saved?
Albert Einstein is arguably considered one of the smartest people to have ever lived, so when quotes are attributed to him, most of us would be wise to listen what he might have said. Below are 3 such quotes.
There have been plenty of times the stock market has dropped by a significant amount (see below).
Despite all these market declines (and many others) the stock market has grown by 1,100x over the last 70 years! Meaning $1,000 invested 70 years ago would be worth over $1,000,000 today.
· May 1946 to May 1947. Stocks decline 28.4%. A surge of soldiers return from World War II, and factories across America return to normal operations after years of building war supplies. This disrupts the economy as the entire world figures out what to do next. Real GDP declines 13% as wartime spending tapers off. A general fear that the economy will fall back into the Great Depression worries economists and investors.
· June 1948 to June 1949. Stocks decline 20.6%. A world still trying to figure out what a post-war economy looks like causes a second U.S. recession with more demobilization. Inflation surges as the economy adjusts. The Korean conflict heats up.
· June 1950 to July 1950. Stocks fall 14%. North Korean troops attack points along South Korean border. The U.N Security Council calls the invasion "a breach of peace." U.S. involvement in the Korean War begins.
· July 1957 to October 1957. Stocks fall 20.7%. There's the Suez Canal crisis and Soviet launch of Sputnik, plus the U.S. slips into recession.
· January 1962 to June 1962. Stocks fall 26.4%. Stocks plunge after a decade of solid economic growth and market boom, the first "bubble" environment since 1929. In a classic 1962 interview, Warren Buffett says, "For some time, stocks have been rising at rather rapid rates, but corporate earnings have not been rising, dividends have not been increasing, and it's not to be unexpected that a correction of some of those factors on the upside might occur on the downside."
· February 1966 to October 1966. Stocks fall 22.2%. The Vietnam War and Great Society social programs push government spending up 45% in five years. Inflation gathers steam. The Federal Reserve responds by tightening interest rates. No recession occurred.
· November 1968 to May 1970. Stocks fall 36.1%. Inflation really starts to pick up, hitting 6.2% in 1969 up from an average of 1.6% over the previous eight years. Vietnam War escalates. Interest rates surge; 10-year Treasury rates rise from 4.7% to nearly 8%.
· April 1973 to October 1974. Stocks fall 48%. Inflation breaks double-digits for the first time in three decades. There's the start of a deep recession; unemployment hits 9%.
· September 1976 to March 1978. Stocks fall 19.4%. The economy stagnates as high inflation meets dismal earnings growth. Adjusted for inflation, corporate profits haven't grown for eight years.
· February 1980 to March 1980. Stocks fall 17.1%. Interest rates approach 20%, the highest in modern history. The economy grinds to a halt; unemployment tops 10%. There's the Iran hostage crisis.
· November 1980 to August 1982. Stocks fall 27.1%. Inflation has risen 42% in the previous three years. Consumer confidence plunges, unemployment surges, and we see the largest budget deficits since World War II. Corporate profits are 25% below where they were a decade prior.
· August 1987 to December 1987. Stocks fall 33.5%. The crash of 87 pushes stocks down 23% in one day. No notable news that day; historians still argue about the cause. A likely contributor was a growing fad of "portfolio insurance" that automatically sold stocks on declines, causing selling to beget more selling -- the precursor to the fragility of a technology-driven marketplace.
· July 1990 to October 1990. Stocks fall 19.9%. The Gulf War causes an oil price spike. Short recession. The unemployment rate jumps to 7.8%.
· July 1998 to August 1998. Stocks fall 19.3%. Russia defaults on its debt, emerging market currencies collapse, and the world's largest hedge fund goes bankrupt, nearly taking Wall Street banks down with it. Strangely, this occurs during a period most people remember as one of the most prosperous periods to invest in history.
· March 2000 to October 2002. Stocks fall 49.1%. The dot-com bubble bursts, and 9/11 sends the world economy into recession.
· November 2002 to March 2003. Stocks fall 14.7%. The U.S. economy puts itself back together after its first recession in a decade. The military preps for the Iraq war. Oil prices spike.
· October 2007 to March 2009. Stocks fall 56.8%. The global housing bubble bursts, sending the world's largest banks to the brink of collapse. The worst financial crisis since the Great Depression.
· April 2010 to July 2010. Stocks fall 16%. Europe hits a debt crisis while the U.S. economy weakens. Double-dip recession fears.
· April 2011 to October 2011. Stocks fall 19.4%. The U.S. government experiences a debt ceiling showdown, U.S. credit is downgraded, oil prices surge.
· June 2015 to August 2015. Stocks fall 11.9%. China's economy grinds to a halt; the Fed prepares to raise interest rates.
Don't let fear and market volatility stop you from reaching your long-term goals. Spend less than you earn, do your research, and build a sustainable long-term financial plan.
The Back Story
Although Berkshire Hathaway is today associated with Warren Buffett and his long-time partner Charlie Munger, the origins of the company actually stem from 1839.
The original company was a textile mill in Rhode Island, and by 1948 Berkshire employed 11,000 people and brought in $29.5 million in revenue (about $300 million in today’s dollars).
After Berkshire’s stock began to decline in the late 1950s, Buffett saw value in the company and started accumulating shares. By 1964, Buffett wanted out, and the company’s CEO Seabury Stanton offered to buy Buffett’s shares for $11.37, which was $0.13 less than he had previously promised Warren he would buy them for. Buffett didn't take kindly to the previously promised deal, and instead of taking the offer, and selling his shares back, he opted to buy more shares. Eventually he took control of the company and fired Stanton.
The company was his, and the rest is history...
In the long-running contest of Warren Buffett vs. the stock market, the scoreboard isn’t even close:
Berkshire Hathaway (1964-2017) 2,404,748%
S&P 500 15,508%
Compound annualized gain
Berkshire Hathaway (1964-2017) 20.9%
S&P 500 9.9%
Source: BH Annual Report. BH’s market value is after-tax, and S&P 500 is pre-tax, including dividends.
At some point in your life you may receive a large sum of cash, such as a pension payout or inheritance.
Many investors nevertheless choose to put the money to work over time, a systematic implementation plan that is commonly referred to as dollar-cost averaging.
History and theory support immediate investment.
On average, an immediate lump-sum investment has outperformed systematic implementation strategies across global markets. This conclusion is consistent with finance theory, as immediate investment exposes cash to (historically) upward-trending markets for a greater period of time.
Immediate investment led to greater portfolio values approximately 68% of the time based on a 60/40 portfolio). On average, immediate investment outperformed systematic implementation by a high of 2.39%. These findings are unsurprising. Stocks and bonds have historically produced higher returns than cash, as compensation for their greater risks. By putting a lump-sum to work right away, investors have been able to take advantage of these risk premia for a slightly longer period.
The research by Vanguard also shows immediate and systematic plans over shorter and longer investment intervals using the same 60/40 portfolio. As the interval increased, the immediate investment outperformed more frequently. For example, immediate investment of a lump-sum outperformed a 6-month series of investments in approximately 64% of the historical periods. Over a 36-month interval, immediate investment outperformed approximately 92% of the time.
Having said this, a systematic implementation provides some protection against regret. Systematic investment of a large sum can be thought of as a risk-reduction strategy. Such an approach can moderate the impact of an immediate market dip. Historically, however, the trade-off has been a lower return in the majority of market scenarios.
So the question to ask yourself is: are you seeking to reduce your regret or are your seeking to maximize your return? Keep in mind, that finance theory and historical evidence suggest that the best way to invest this sum is all at once.