“Buy and hold for the long term! Markets go up and markets go down but in the long run markets have gone up at an 8% annual clip.”
How does that make you feel? Better?
The market is dropping precipitously on a daily basis and all you are told is “to stay the course.”
However, your broker is not the one who has to live on these savings later in life!
Maybe this is how you felt during this most recent of two 2018 market swoons.
Really all you want is a straight answer and somebody who cares.
Well today, I hope to give you that answer.
Is This The Bear Market?
The answer is probably, but we will only definitively know in hindsight.
What we have seen is that the major indexes have given us a bearish divergence on our long-term (monthly charts) which usually means things have changed and the trend is changing.
We have trend lines being challenged and indicators that have historically signaled longer term downward price action crossing key levels, like the MACD histogram at the bottom of the above chart.
Do you need to panic yet? No.
Markets do go up and markets do go down and unless this is a market crash (which no one can predict), this market will bounce again.
The Big Question
The big question is when it bounces do you have a plan?
You know something other than “stay the course.”
Here is our plan:
Step one – take off some market exposure. Check. We did this early on in the decline.
Step two – wait on the bounce, see where it goes and make adjustments to market exposure as necessary. Adding on the rise, removing exposure on a peak.
Step three – continue to adjust exposure as necessary as market confirms trend change.
Step four – enjoy the circus as a hedged (or net short) participant.
Now I know this seems simple and believe me it is not. But does your advisor have a plan?
Our plan may not work out exactly as advertised but at least we are doing our job of trying to client protect capital.
What About The Fact That Markets Always Recover?
Great question and no doubt this one will recover (if you live long enough). The Great Recession of 2007—2008 recovered its losses in five+ years because of substantial government intervention.
The underlying excesses were never really corrected, just papered over. So with Federal Reserve interest rates still quite historically low and their balance sheet still very large, what are the odds they will intervene in any substantial way this time around?
I would guess, not very great!
So what if the recovery this time takes eight or even ten years? How would that affect your financial planning?
For most Americans, it would be devastating!
Here is the math for you technical few:
A 50% decline in the value of your portfolio requires a 100% return to get back to break even.
If the market average is 8% for the sake of argument, how many years would it take to recover just a 45% loss?
Almost 8 years.
So if we had a 50% decline it is quite feasible you could spend most, if not all, the next up cycle just trying to get to break even. Just reaching break even in time for the next bear market assuming a 10 year cycle, which is one of the longest in history already.
The solution is simple! You have to do something.
Don’t let some newly minted broker or advisor tell you to just “buy and hold.” In this market, that could be a recipe for disaster!
Let us know if we can help.
Last week I attended the life celebration for one of my favorite clients who passed away recently at the impressive age of 100. Interestingly enough that individual's life celebration event was held on the date that client would have been 101.
As you might expect, the celebration began with family telling how much she meant to them. Many tears were shed!
It then transitioned to both local and national charities providing testimonials about this client’s big heart and focused charitable mission. Interspersed between live speakers and video pieces were more video clips of this incredible person’s goals to support childhood education as a way to hopefully keep some of those kids from becoming crime statistics.
This person’s belief was that early childhood education and education in general could reduce the worlds’ overcrowded prisons.
Whether you concur or not two things struck me:
First, how focused this client was in giving and second, what a difference this client made as result of being focused in giving.
The whole event made me re-examine how I/we were giving and wonder aloud with my wife if we were as focused as this client.
As a result, we came up with five ways to realign our charitable giving with our passion. Here they are:
1. Find Your Passion
This is one is almost self explanatory. I have been on enough charitable boards to tell you that unless you are passionate about something, it will just get old in a hurry!
I distinctly remember one such education related board position I took just for the perceived networking value. Not only was I not passionate about the organization’s mission, but my lack enthusiasm for its mission actually showed to those I met and worked against me in my networking.
Of course the complete opposite has been the case with my involvement with many other organizations where my excitement level led me to great satisfaction, better relationships and better results.
2. Align Your Mission With Your Passion
Here the simple action step is find your passion and then align where you spend your time, give your treasures (funds) and use your talents with that passion.
After this client’s celebration, my wife and I sat down and determined that our passion was still for international missions. International missions that either make or train disciples, support the oppressed or care for orphans.
This newly aligned mission and passion is the sweet spot for our giving.
3. Cull The Dead Wood
Hopefully by this point you have a pretty good idea of what you are passionate about and how to align your mission with that passion.
The next step is to see where you are giving of your time, treasures and talents and eliminate those charitable activities that no longer fit with your mission.
This quite frankly can be the though part as I have never met a charity that did not need additional resources and here you are pulling back those valued inputs. However, like my failed foray into the world of educational charities, the world will be a better place in the long-term if you are truly passionate about your giving.
My suggestion is you set a date in the future, give them proper notice of at least 90 days and then soften the blow a bit with the reason you are pulling back your giving. They will respect you for your candor, even though they may not be excited about its impact on them.
4. Determine How Best to Use Your Time, Treasures or Talents
Hand and hand with culling the dead wood is the process of determining the best uses of your resources. As a result of your cull of certain charitable activities, you may have extra time, funds or talents to lend to the right charity.
You may decide that you already have the right charities and now its just a matter of realigning your available resources with that slimmed down list.
The point here is to develop a plan to maximize the impact of your giving on existing or possibly new organizations where your mission can best be met.
5. Measure Your Impact
The final step is to measure your results and fine tune your giving. This is the measurable part of goal setting.
What do you hope to accomplish, over what time period and what does an acceptable result look like?
Remember this is a process, you may need to periodically reassess your commitments to keep them in line with your goals.
Let me know what you think in the comments below.
Written By: Jeff Diercks
According to many market watchers, August notched a new milestone for the current bull market. It marked the longest bull market in terms of days in history as it eclipsed 3,453 days on August 22nd.
Of course, many would argue that this depends on your starting point. Some would argue that we had a bear market (defined as a correction of greater than 20%) in 2011 and so the end of that correction is the starting point of the current bull run which then greatly shortens this calculation.
From our perspective, who cares!
Let’s ride the bull market as long as it wants to keep moving up. The longer the better!
When the bull market does finally signal the end, our process will help us move aside or hedge our remaining positions to minimize those losses.
In the early days of my career, I tried to predict market tops and was wrong almost 100% of the time, but not anymore.
I have no idea!
Oh, I can tell you that we are probably much closer to the end statistically than the beginning! I would probably even warn you that you need to know where the exit sign is because the average bear market is no picnic!
Technically, I can probably warn you at the correct time that it appears the market is ready to move lower. However, I cannot guarantee you that that correction will turn into a bear market and that we have seen a top, except in retrospect. The last few words here are key here!
As trend followers, our models are not predictive. They are reactive. We will only know a turning point in retrospect and then we react.
So how much of a shine would the average bear market take off the average American’s portfolio? Is this even worth worrying about?
As you can see in First Trust/Morningstar chart above, the average bear market lasts 1.4 years and brings a cumulative loss of -41%.
Let that sink in a bit!
If your current portfolio value is now $425,000 at the end of the average bear market it will be worth just $250,750 at the bottom. That is quite a hit!
According to First Trust/Morningstar, the average bull market rises 9.1 years and 476%.
So how long then does it take to recover this 41% hit ? The answer is? It depends!
If we use an average of the annualized bull market returns from the First Trust/Morningstar chart, that would be approximately a 20% annual return, so roughly 2.8 to 3.0 years.
Quite honestly not as long as I had expected and certainly the bull market returns at almost 20% per annum are more than I would have guessed.
However, what if instead of losing 41%, your portfolio value, you only lost 10% (or maybe even made money as we believe we can do with a couple of our portfolio solutions)?
Well happy days! The recovery period at an annual return of 20% in a bull market assuming a 10% bear market loss is just .6 years.
In our case, I would be shocked if our clients lost 10%. We believe 5-6% is probably the maximum and that further shortens this recovery period to just .3 years or 3.6 months.
What this means is that our clients are in theory enjoying market profits much faster than the person who just buys and holds through entire market cycles.
The buy and hold investor must wait almost 3 years to get back to break even before they can start earning new returns.
If fact, this period to break even is usually even longer because the average investor does not usually do as well as the market averages.
According to the Investment Company Institute and Real Investment Advice.com, the average investor underperforms the S&P 500 index by almost 38%. Assuming that is correct, the recovery period for the average investor now grows to 4.5 years.
Let’s assume we investment just as badly (not likely) and our recovery period on a 10% loss grows from .6 to .96 years (almost 1 full year).
Which scenario would you rather have? A one-year recovery or a 4.5-year recovery?
The choice is yours, but if you are like most Americans, it may be time you focus more on that exit door and give us a call!
Written by: Jeff Diercks