Market Update
As we write this today, yields on long term bonds are at the highest we have seen in several years. The economy, according to numerous recent reports, is stronger than we have seen in quite some time. As we eluded to in last month's newsletter, we are seeing significant divergence in returns of different investment categories. We are beginning to get emails and phone calls from clients that are falling into 2 groups. The first are those that are listening to the talking heads on TV and radio telling us how terrific everything is and that investment returns have been equally terrific. Even our own POTUS has told us this on numerous occasions. The second group are those that are afraid that the market is ripe for a correction and want to know what to do.
We feel compelled to chime in and provide some education and pertinent data points to support what is really going on. Before we do, however, we want to remind you of some very important facts that must be followed when creating diversified portfolios.
1. We believe that is important to maintain a well-diversified portfolio of investment that is appropriate for one's time frame and risk tolerance. When doing so, we are looking for risk adjusted returns appropriate for each investor's specific situation.
2. We believe in investing with a "Margin of Safety". Meaning that we must look for investments that are trading significantly below their intrinsic value. This is a philosophy developed by the "father of value investing", Benjamin Graham, and written about in detail in his 1949 book, The Intelligent Investor. In the book, Graham uses an allegory of that of "Mr. Market". The point of this anecdote is that the investor should not regard the whims of Mr. Market as a determining factor in the value of the shares the investor owns. One should profit from market folly rather than participate in it. The investor is advised to concentrate on the real-life performance of his companies and receiving dividends, rather than be too concerned with Mr. Market's often irrational behavior.
3. We believe that it is impossible to time the market. We have often said that "time in the market is far more important that timing the market". There is too much credible data to avoid the fact that this is true.
4. We believe in asset allocation as a core philosophy. According to Wikipedia, "asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame." Further, when using asset allocation, it is important to be aware of withdrawal rate risk, the risk of withdrawing too much too fast. This is exacerbated when withdrawals are made when investments are losing value.
That all being said, we do also believe that it is prudent to be tactical at times in which we feel as though beta (risk) can potentially be reduced and alpha (return) can be potentially increased. It is important to note that when employing asset allocation and a tactical overlay, one must be patient for opportunities to be created and be willing to withstand some volatility as we wait to capitalize on those opportunities.
Now on to current events...
There is no doubt that the Dow Jones Industrial Average and the S&P 500 indices have had a banner year. Up 8.83% and 10.56% respectively as of the end of September. However, one must understand that these are not indicative of a diversified mix of investments and not necessarily a good comparison of an investor's portfolio.
When managing money for clients as we do at RAA, it is important to look at benchmarks to gauge performance.
Let's look at some specific examples.
We think you many of you recognize the names BlackRock and iShares as industry experts. We use a lot of their research when making investment decisions.
The iShares Core Growth Allocation ETF (AOR) is a low-cost fund designed for long term growth that invests in a broad mix bonds and global stocks. As of 08/31/18, the fund has an average return since inception of 8.42% since inception (11/04/2008). However, as of 10/03/18, YTD the fund has returned 1.56%...9.00% below the S&P 500.
We also pretty are certain that everyone reading this has heard of Fidelity Investments, another well respected and trusted company.
The Fidelity Freedom 2030 fund (FFFEX) is a fund designed for someone planning to retire around the year 2030. In other words, the fund is for someone with a time horizon to retirement of approximately 10-15 years. This fund also has a very good long-term track record. As of 09/30/18, since inception (10/17/1996), the fund has an average return of 7.05%. However, YTD, the fund is up 3.17%...7.39% below the S&P 500.
Lastly, we will look at Vanguard. Clark Howard and many other pundits love Vanguard, the low-cost king.
The Vanguard LifeStrategy Growth Fund (VASGX) in a broadly diversified, low-cost, risk- based fund with a target allocation of 80% stocks and 20% bonds. As of 09/30/18, the fund has an average return of 8.18% since inception (09/30/1994). However, as of 10/03/18, YTD the fund has a return of 3.57%...6.99% below the S&P 500.
Let's add a few other tidbits to bring this home...
As of the time of writing this, bonds are down approximately 2%, developed country international stocks are also down approximately 2%, emerging markets stocks are down roughly 9% and gold is down 7.5%.
The moral of the story is that we need to compare apples to apples not our diversified portfolio to the stock of apple (AAPL)...pun intended.
The last thing we would like to share is an article that came out yesterday on CNBC.com
https://www.cnbc.com/2018/10/03/stocks-are-trading-at-record-levels-but-a-look-under-the-hood-shows-a-much-more-fragile-market.html
In the article, they mention some of same points we have written about recently. One thing we found particularly telling is this segment:
While the major indexes are trading at or near record highs, the number of stocks listed at the New York Stock Exchange at 52-week lows was three times higher on Tuesday than those at 52-week highs, according to data from SentimenTrader. This is the first time since Dec. 28, 1999, that such a disparity took place and the second since 1965, the data show. Investors look at the number of 52-week highs and lows made by stocks as a sign of market participation. In other words, more stocks making 52-week highs signals broad participation in an uptrend. Meanwhile, fewer 52-week highs during an uptrend suggest limited participation.
We hope you find this information helpful. We look forward to discussing in more detail in our meetings and phone calls.
Please contact us if you have any feedback or questions.
To our family of clients, Thank you for your business and loyalty!
To any of you that have are not part of our family, this may be a great time to schedule a time to discuss your personal financial situation.
