Lutz Financial: Market Update

Lutz Financial: Market Update

INSIGHTS

Lutz Financial: Market Update

JOSH JENKINS, LUTZ FINANCIAL SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

After recently hitting an all-time high, the U.S. stock market has experienced a return to volatility. While it’s perfectly natural to be uncomfortable watching the prices trend lower the way they have, it’s important to remember gyrations in a given week, month, or even year are generally not going to impact your financial plan and long-term goals. Still, we felt this was a good opportunity to reach out and let you all know what we are thinking.

Market Declines are Normal and Healthy

Last year was smooth sailing for investors as the market steadily marched higher with virtually no volatility. That experience was highly unusual, however, as the table below illustrates. Based on a study from the Capital Group, the stock market experiences a decline of -5% or more three times a year on average, and a -10% decline once a year. What we are experiencing today is normal, the uninterrupted gains of 2017 were not.

A History of Market Declines

After an extended period without a meaningful pullback, it’s easy to become complacent. When the market finally does retreat, it can feel like a shock to the system. The financial media certainly does not help the situation. Their business is predicated on attracting viewers, and perpetuating fear is extremely effective at doing that.

The truth of the matter is the market can sometimes rise too far too fast. When this happens, prices need to correct and reset for future gains. The beginning of this year offers a great example of this. Stocks went gangbusters in January, dipped in February and March, then rebounded and steadily moved to new highs.

While we know declines are an inevitable part of the market cycle, we don’t know how long they will last, or how far prices will fall. It is okay not to know these things, because nobody else knows either. The important thing is having a plan in place for when they arise.

The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” – Warren Buffett

Emotional Investing Leads to Bad Outcomes

When it comes to building and maintaining wealth, investors are often their own worst enemy. Rather than execute decisions based on thorough analysis, they have knee jerk reactions based on fear and greed. Everyone is susceptible to this pitfall – it’s the result of thousands of years of evolution. Our ancestors living in caves would not have survived long enough to procreate if they stopped to do a S.W.O.T. analysis each time they sensed danger. The fight or flight response kept them alive. While these emotions can keep us from physical danger, they often lead to poor decisions when it comes to investing.

The chart below from J.P. Morgan illustrates the conclusion of the prominent DALBAR study, which measured investor returns over a 20-year period. The result is not pretty. The average investor (orange column) earned just 2.6%, much lower than the funds they were investing in! The underperformance is largely the result of poor timing decisions, such as chasing recent winners and dumping recent losers. It may seem obvious that buying high and selling low is a poor strategy, but our raw desire to have more money than our neighbor, or to protect our life savings from decline can trump rational thought. A disciplined investor that was able to buy and hold a balanced portfolio like the 60/40 or 40/60 on the chart would have more than doubled the return of the average investor. Compounding a reasonable return over the next 20 years is how you build wealth, not trying to pick the next Amazon.

20-year annualized returns by asset class (19998-2017)

What Should Investors Do?

The best thing for investors to do is tune out the noise from the day to day gyrations in the market. Understand there will be bumps (sometimes large ones) in the road from time to time. Remember this is normal, healthy, and often offers a good opportunity to buy at a discount or harvest some losses. Keep emotions under control. Don’t become too excited when things are going well, or to down when things look dire. The best advice anyone can give, is to build a sound plan and then stick to it.

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over eight years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE
THOUGHT LEADERSHIP

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Tuning Out the Noise

Tuning Out the Noise

INSIGHTS

Tuning Out the Noise

If you are feeling uneasy about your investment performance during these periods of volatile market activity, download this video, “Tuning Out the Noise” to help remind you of the importance of remaining disciplined during uncertain times.

 

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

SOURCE: RPAG
COPYRIGHT 2018 RPAG. ALL RIGHTS RESERVED.
120 VANTIS, SUITE 400 ALISO VIEJO, CA 92656 949.305.3859

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

Lessons for the Next Crisis

Lessons for the Next Crisis

INSIGHTS

Lessons for the Next Crisis

September 2017

It will soon be the 10-year anniversary of when, in early October 2007, the S&P 500 Index hit what was its highest point before losing more than half its value over the next year and a half during the global financial crisis.

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman Brothers), there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis. It is difficult to draw useful conclusions based on such observations; financial markets have a habit of behaving unpredictably in the short run. There are, however, important lessons that investors might be well-served to remember: Capital markets have rewarded investors over the long term, and having an investment approach you can stick with—especially during tough times—may better prepare you for the next crisis and its aftermath.

 

BENEFITS OF HINDSIGHT

In 2008, the stock market dropped in value by almost half. Being a decade removed from the crisis may make it easier to take the past in stride. The eventual rebound and subsequent years of double-digit gains have also likely helped in this regard. While the events of the crisis were unfolding, however, a future of this sort looked anything but certain. Headlines such as “Worst Crisis Since ’30s, With No End Yet in Sight,”[1] “Markets in Disarray as Lending Locks Up,”[2] and “For Stocks, Worst Single-Day Drop in Two Decades”[3] were common front page news. Reading the news, opening up quarterly statements, or going online to check an account balance were, for many, stomach-churning experiences.

While being an investor today (or during any period, for that matter), is by no means a worry-free experience, the feelings of panic and dread felt by many during the financial crisis were distinctly acute. Many investors reacted emotionally to these developments. In the heat of the moment, some decided it was more than they could stomach, so they sold out of stocks. On the other hand, many who were able to stay the course and stick to their approach recovered from the crisis and benefited from the subsequent rebound in markets.

It is important to remember that this crisis and the subsequent recovery in financial markets was not the first time in history that periods of substantial volatility have occurred. Exhibit 1 helps illustrate this point. The exhibit shows the performance of a balanced investment strategy following several crises, including the bankruptcy of Lehman Brothers in September of 2008, which took place in the middle of the financial crisis. Each event is labeled with the month and year that it occurred or peaked.

 

Performance of a Balanced Strategy: 60% Stocks, 40% Bonds (Cumulative Total Return)

 

In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Marketwide Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% Citigroup World Government Bond Index 1-5 Years (hedged), 10% Citigroup World Government Bond Index 1-3 Years (hedged), 10% BofA Merrill Lynch 1-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Citigroup Indices used with permission, © 2017 by Citigroup. Bloomberg Barclays data provided by Bloomberg. For illustrative purposes only. Dimensional indices use CRSP and Compustat data. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Rebalanced monthly. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See Appendix for additional information.

 

Although a globally diversified balanced investment strategy invested at the time of each event would have suffered losses immediately following most of these events, financial markets did recover, as can be seen by the three- and five-year cumulative returns shown in the exhibit. In advance of such periods of discomfort, having a long-term perspective, appropriate diversification, and an asset allocation that aligns with their risk tolerance and goals can help investors remain disciplined enough to ride out the storm. A financial advisor can play a critical role in helping to work through these issues and in counseling investors when things look their darkest.

 

Conclusion

In the mind of some investors, there is always a “crisis of the day” or potential major event looming that could mean the beginning of the next drop in markets. As we know, predicting future events correctly, or how the market will react to future events, is a difficult exercise. It is important to understand, however, that market volatility is a part of investing. To enjoy the benefit of higher potential returns, investors must be willing to accept increased uncertainty. A key part of a good long-term investment experience is being able to stay with your investment philosophy, even during tough times. A well‑thought‑out, transparent investment approach can help people be better prepared to face uncertainty and may improve their ability to stick with their plan and ultimately capture the long-term returns of capital markets.

 

Appendix

Balanced Strategy 60/40

The model’s performance does not reflect advisory fees or other expenses associated with the management of an actual portfolio. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor’s decision making if the advisor were actually managing client money. The balanced strategies are not recommendations for an actual allocation.

International Value represented by Fama/French International Value Index for 1975–1993. Emerging Markets represented by MSCI Emerging Markets Index (gross dividends) for 1988–1993. Emerging Markets weighting allocated evenly between International Small Cap and International Value prior to January 1988 data inception. Emerging Markets Small Cap represented by Fama/French Emerging Markets Small Cap Index for 1989–1993. Emerging Markets Value and Small Cap weighting allocated evenly between International Small Cap and International Value prior to January 1989 data inception. Two-Year Global weighting allocated to One‑Year prior to January 1990 data inception. Five-Year Global weighting allocated to Five-Year Government prior to January 1990 data inception. For illustrative purposes only.

The Dimensional Indices used have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inceptions dates. Accordingly, results shown during the periods prior to each Index’s index inception date do not represent actual returns of the Index. Other periods selected may have different results, including losses.

Index Descriptions

Dimensional US Large Cap Value Index is compiled by Dimensional from CRSP and Compustat data. Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market with market capitalizations above the 1,000th‑largest company whose relative price is in the bottom 30% of the Dimensional US Large Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price. The index emphasizes securities with higher profitability, lower relative price, and lower market capitalization. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: non-US companies, REITs, UITs, and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to March 2007. The calculation methodology for the Dimensional US Large Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market with market capitalizations above the 1,000th‑largest company whose relative price is in the bottom 20% of the Dimensional US Large Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price.

Dimensional US Small Cap Index was created by Dimensional in March 2007 and is compiled by Dimensional. It represents a market‑capitalization‑weighted index of securities of the smallest US companies whose market capitalization falls in the lowest 8% of the total market capitalization of the Eligible Market. The Eligible Market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: Non-US companies, REITs, UITs, and investment companies. From January 1975 to the present, the index also excludes companies with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Source: CRSP and Compustat. The index monthly returns are computed as the simple average of the monthly returns of 12 sub-indices, each one reconstituted once a year at the end of a different month of the year. The calculation methodology for the Dimensional US Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

Dimensional US Small Cap Value Index is compiled by Dimensional from CRSP and Compustat data. Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose relative price is in the bottom 35% of the Dimensional US Small Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price. The index emphasizes securities with higher profitability, lower relative price, and lower market capitalization. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: non-US companies, REITs, UITs, and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to March 2007. The calculation methodology for the Dimensional US Small Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose relative price is in the bottom 25% of the Dimensional US Small Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price.

Dimensional International Marketwide Value Index is compiled by Dimensional from Bloomberg securities data. The index consists of companies whose relative price is in the bottom 33% of their country’s companies after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasizes companies with smaller capitalization, lower relative price, and higher profitability. The index also excludes those companies with the lowest profitability and highest relative price within their country’s value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional International Marketwide Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index.

Dimensional International Small Cap Index was created by Dimensional in April 2008 and is compiled by Dimensional. July 1981–December 1993: It Includes non-US developed securities in the bottom 10% of market capitalization in each eligible country. All securities are market capitalization weighted. Each country is capped at 50%. Rebalanced semiannually. January 1994–Present: Market-capitalization-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of a different quarter of the year. Prior to July 1981, the index is 50% UK and 50% Japan. The calculation methodology for the Dimensional International Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

Dimensional International Small Cap Value Index is defined as companies whose relative price is in the bottom 35% of their country’s respective constituents in the Dimensional International Small Cap Index after the exclusion of utilities and companies with either negative or missing relative price data. The index also excludes those companies with the lowest profitability within their country’s small value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional International Small Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1994: Created by Dimensional; includes securities of MSCI EAFE countries in the top 30% of book-to-market by market capitalization conditional on the securities being in the bottom 10% of market capitalization, excluding the bottom 1%. All securities are market-capitalization weighted. Each country is capped at 50%; rebalanced semiannually.

Dimensional Emerging Markets Index is compiled by Dimensional from Bloomberg securities data. Market capitalization-weighted index of all securities in the eligible markets. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.

Dimensional Emerging Markets Value Index is compiled by Dimensional from Bloomberg securities data. The index consists of companies whose relative price is in the bottom 33% of their country’s companies after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasizes companies with smaller capitalization, lower relative price, and higher profitability. The index also excludes those companies with the lowest profitability and highest relative price within their country’s value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional Emerging Markets Value Index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. Prior to January 1994: Fama/French Emerging Markets Value Index.

Dimensional Emerging Markets Small Cap Index was created by Dimensional in April 2008 and is compiled by Dimensional. January 1989–December 1993: Fama/French Emerging Markets Small Cap Index. January 1994–Present: Dimensional Emerging Markets Small Index Composition: Market-capitalization-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of a different quarter of the year. Source: Bloomberg. The calculation methodology for the Dimensional Emerging Markets Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

 

Source: Dimensional Fund Advisors LP.There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

 

[1]wsj.com/articles/SB122169431617549947.

[2]washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091700707.html.

[3]nytimes.com/2008/09/30/business/30markets.html.

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All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

Is it Time to “Beary” This Bull Market?

Is it Time to “Beary” This Bull Market?

INSIGHTS

Is it Time to “Beary” This Bull Market?

NICK HALL, INVESTMENT ADVISER

It was Friday, March 6, 2009, and the stock market was in the midst of a six month freefall. In the last six months the Fed had stepped in and bailed out the banking system with the TARP program, Bear Stearns had been bailed out, the government salvaged Freddie Mac and Fannie Mae who guaranteed over half of the nation’s mortgages, and Lehman Brothers, the fourth largest investment bank in the United States, declared bankruptcy. That day the Dow Jones and S&P 500 hit 12-year lows on the heels of an extremely bleak February Jobs report which signaled 4.5 million jobs had been lost to that point. But something strange happened that afternoon, the stock market clawed its way back in the last hour of trading to the point where the Dow finished up 0.4% and the S&P 500 ended up 0.1% on the day. There were no bells or whistles to suggest this was the sign of more rosy things to come, but we know now the Great Recession would hit an absolute market low on Monday, March 9th. This month marks the 8-year anniversary of the current bull market since that time. As we sit here in March 2017, many investors are now wondering, “When will this market run come to an end?” This article will look at past bull and bear markets and argue that no one really knows the true answer to this question.

 

A Historical Look at Bull and Bear Markets

With the recent run in the equity markets since the Presidential election in November 2016, there has been a sense of pessimism from many camps that this market run has seen its day and there will be a big correction in the very near future. “How much longer will this bull market last?” When asked this question by clients, our answer remains, “Nobody knows for sure.” Even though each market cycle is different by definition, we can examine past bull and bear market cycles to observe particular patterns. The chart below shows bull and bear markets from 1903 to 2016:

 

 

*Data Source: Robert Shiller’s data library. Calculations by Newfound Research. Bull markets are defined from the lowest close reached after the market has fallen 20% or more to the next market high.  Bear markets are defined from the last market high prior to the market closing down at least 20% to the lowest close after it’s down 20% or more.  Monthly data is used to make these calculations.  Past performance does not guarantee future results.

This chart illustrates that since 1903, there have been 12 bull markets and 6 that have lasted longer than the current run. Additionally, 5 of those market runs have been much steeper than the current climb of about 250%. Bull markets, in general, tend to be longer and more pronounced; whereas bear markets tend to be much shorter in length and less pronounced in depth. One metric to look at is where current markets are valued in relation to price. Due to the recent run in the equity markets, the Price/Earnings ratio of the S&P 500 is what we would call on the high side of historical averages, but it is not out of line and certainly nowhere remotely near levels seen in the late 1990s at the end of the tech boom. With job reports being positive and strong corporate earnings also purveying, this market could conceivably continue to run for a while longer.

 

This Bull Ride has Been Bumpy

Making emotional moves about short-term movements in the market is speculating, not investing. During the current 8-year bull market run there have been many geopolitical and economic events leading people to think that might be an appropriate time to sell equities. These events which have been sources of investor uneasiness include the Flash Crash, European Debt Crisis of 2011, Fiscal Cliff, Ebola virus, Chinese stock crash in the summer of 2015, the worst January in history for the S&P 500 index in 2016, Brexit, and most recently the US presidential election. Typically the media overreacts to these events and their correlation to long-term stock market performance which gives people reason to believe this will lead to the end of the current stock market run or cause global market slowdowns. The point being made is if you had listened to the “experts” or “talking heads” during these events you would have likely acted emotionally and missed a good portion of a healthy equity market over the last 8 years.

 

 

Three Things You Can Control

Instead of speculating on when the next pullback will be, we preach that investors can do things to mitigate certain risk that is inherent with exposure to the stock market. At the top of this list is broad diversification. Owning thousands of different companies of different sizes around the world is one of the only free lunches in investing. Different asset class sectors and industries move differently in different market environments, and owning some of each can help minimize the overall volatility of a portfolio versus trying to pick a handful of stocks or continually bouncing in and out of the market.

Secondly, understanding your own particular needs will go a long way in helping mitigate some risk. We preach that it is critically important to develop a game plan for saving and clearly define goals or spending needs before entering retirement. This exercise can ensure your asset allocation (%stocks/%bonds) is aligned accordingly to avoid subjecting your nest egg to additional, unnecessary risk. We encourage people who are entering retirement to have anywhere from at least 7-10 years’ worth of shortfall expenses in safe, conservative fixed income to weather market downturns or short-term volatility.

Lastly, it is important to remove emotion from the investing process. This can be done by implementing a disciplined trading strategy that uses mathematical formulas and not human emotion to systematically rebalance a portfolio. A strategy employed by Lutz Financial sells asset classes which have performed well relative to the rest of the portfolio and subsequently purchases asset classes that have decreased or lagged behind the overall portfolio on a relative basis. This is one of the harder things to do in investing because it is often counterintuitive or goes against conventional wisdom.

 

Why Play The Guessing Game?

We do know this bull market will end with a correction at some point. Will that be in 6 years or 6 days? You don’t have to have some magic crystal ball to predict when this will happen to have the successful investment experience that a diversified portfolio will hopefully allow. You can weather the short-term downturns of the market that are certain to occur by maintaining a long-term, disciplined investment philosophy and allowing yourself enough intermediate-term sources of liquidity to avoid having to sell equities at the wrong time.

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

nhall@lutz.us

LINKEDIN

NICK HALL, CFP® + INVESTMENT ADVISER

Nick Hall is an Investment Adviser at Lutz Financial with over eight years of industry experience. He specializes in comprehensive financial planning and investment advisory management services.

AREAS OF FOCUS
  • Financial Planning
  • Investment Advisory Services
  • Retirement Planning
  • Income Tax Planning
  • Social Security and Medicare Planning
  • Education Planning
  • Investment Product Research
  • Small Business Owners
  • High Net Worth Families in Transition
AFFILIATIONS AND CREDENTIALS
  • Financial Planning Association of Nebraska, Member
  • Certified Financial Planner
EDUCATIONAL BACKGROUND
  • BSBA in Finance and Business Management, Eller College of Management - University of Arizona, Tuscon, AZ
COMMUNITY SERVICE
  • Mount Michael Benedictine, Alumni Board President-Elect
  • Lutz Gives Back, Committee member
  • United Way, Volunteer
  • Salvation Army, Volunteer
  • Omaha Home For Boys, Volunteer
  • Susan G. Koman Race for the Cure, Volunteer

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

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Grand Island, NE 68801

P: 308.382.7850

Nobody Knows Anything

Nobody Knows Anything

INSIGHTS

Nobody Knows Anything

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

At times like these when you try to comprehend what is going on around you, I go back to take some solace in advice from one of the men that would be on the Mount Rushmore (pardon the analogy) of investments.  Jack Bogle, who founded the Vanguard Group, when he was once a young brokerage firm runner and a fellow runner, much older than he was at the time, told him a secret which was the best investing advice he noted that he’s ever gotten.  Simply put, his fellow runner told him: “Nobody knows anything”.  Mr. Bogle went on to invent the index mutual fund and found the largest mutual fund company in the entire world on the heels of that advice.

 

The surprising results of last night’s election will reverberate in the history books for a long time.  Today, many are going to try to rationalize the results and figure out why most everyone got it all wrong.  The media got it wrong, most of the statistical models the world can compute got it wrong, and maybe even Trump’s own camp got it wrong.  The hand wringing will go on for quite some time.  The media, prognosticators and so called experts will spend the next few months trying to tell you all the things that will happen as a result of what they didn’t expect to occur in the first place.  The sheer irony of that should be enough to make us all treat everything with a grain of salt.

 

Much like the Great Recession from 2008-09, the very few who predicted a Trump win will gain more “street credibility” and many will ask them to look in their crystal ball for some more wisdom.  I am sure they’ll have more opinions, but just because they got it right once doesn’t mean they’ll do it again (see Meridith Whitney).

 

What I do know, is that the sun is rising as I type this.  We are all going to continue to work and live our lives regardless of who was going to be elected.  Those who voted for Trump, are waking up excited that he was elected and has a Republican Congress to potentially aid in his change mandate.  Those who voted for Clinton are waking up with the hope that the numerous checks and balances built into the system mitigate some of the risk he may bring.  Either way somebody was going to lose and it was going to be emotional, just be thankful we aren’t having any recounts or “hanging chad” issues this morning.

 

It will be hard to take the emotion out of the equation for some time here no matter who you voted for.  This brings me to what we should do as investors today and in the next few weeks.  With careful planning, we try to prepare our clients for the unexpected, we know it will come but admit we don’t know when.  That is why most of us have some of our portfolios in low-risk/low-volatility investments.  This is what we cling to when the emotions try to get the best of us.  One of the biggest pitfalls of investing is to act emotionally rather than rationally.  You anticipate these bouts of unexpected turbulence when the seas are calm, so we don’t have to react to them.

 

When it was apparent that Trump was going to win early this morning, S&P 500 futures were limit down at a five percent loss and other world markets were in equal turmoil culminating in Japan’s five percent drop.  Five hours later, as I write this they are only off about 1.5%, giving up only part of the gains from Monday and Tuesday.  It most certainly may end up to be a bad day or even a bad year, but nothing is permanent and change will occur.

 

So as you watch the talking heads try to make sense of all of this in the coming weeks just remember that “nobody knows anything”.  Human beings by nature are an emotional lot and entirely unpredictable.  Maybe that is the only thing we really truly know?

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

Add “Brexit” to the Long List of Uncertainty

Add “Brexit” to the Long List of Uncertainty

INSIGHTS

Add “Brexit” to the Long List of Uncertainty

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

A few weeks ago there was polling going on in Britain showing that the push to leave the European Union was statistically ahead of those who wanted to stay in the European Union.  It had an ominous effect on the markets as the Dow fell about 400 points in five days.  European stock markets were sharply lower as the German DAX fell from more than 10,200 to about 9,500 in that same period of time.

 

By yesterday, the day of the British vote to leave the EU, the Dow and DAX had staged a sharp weeklong rally.  This rally coincided with polling samples that showed that the vote to stay in the EU had regained the lead.  Markets were confident that they could rally in the face of the election that they thought would maintain the status-quo (certainty).

 

Of course, we know the surprising results now and realize that the recent polls were wrong.  The British have now voted to leave the EU, an unprecedented occurrence that has potential ramifications many are trying to absorb.  Because of this, it looks like this morning we are giving back a week of gains plus a little more as uncertainty prevails and panic selling has ensued.

 

So what could be the ramifications of this vote?  The first thing that will happen (besides David Cameron’s resignation) is the British will begin to negotiate the legal process of their way out of the EU.  There is no road map, by design.  This was not supposed to happen.  The British referendum is not “legally binding”, but with Cameron’s resignation it looks as if they will proceed with the will of the people.  This is what adds to the continued uncertainty.

 

What will they be negotiating?  First, Britain it is not getting out of the euro currency.  The British never adopted the euro currency to begin with so they don’t have to “convert” back to the pound sterling.  What they are doing is getting out of the economic and political union of 28 countries that was established after World War II to promote unity between Germany and France that laid the foundation for further entries by European countries.  Economically, they agree to trade under the same agreements, politically they have agreed to common borders and abolished passport controls (although the British were never in that particular one).  This agreement has been great economically for London as they became the financial hub of the EU over the years, a position that is now threatened.  You’ll notice most Londoners voted overwhelmingly to stay.

 

Essentially, the biggest thing this vote does is allows for Britain to negotiate its own agreements of trade with the rest of the world, including the rest of the EU.  This is why it is so risky and there are worries it will damage their economy.  Will the EU play hardball to make an example out of them in negotiations?  How will other countries such as China treat them?  These economic agreements range from financial services legislation to fishing quotas.

 

This is why the markets are reacting the way they are today.  Uncertainty is back and the market is repricing in that risk again as it did two weeks ago.  Unfortunately there is going to be plenty of time for “experts”, who probably got the election call wrong in the first place, to weigh in on what they think will happen next.  The talking heads will give you a litany of reasons why they know what will happen next, when in reality they are just guessing.  The trick is not to react to that.  You’ve already laid out your plan and investments to account for some short-term volatility.  This is why we have our clients invest in the boring, high grade, low-yielding fixed-income instruments.  It is not because of the great returns, it is to be the portfolio ballast in times of rough seas.  It’s to allow you to not have sell equities on a day the market drops wildly.

 

For example, I am sure companies like Union Pacific will be down today, perhaps materially.  But ask yourself when you see it, why a US railroad would be impacted by the British voting to renegotiate their trade compacts with the rest of the world?  I am sure some of those railcars are moving crops or something to the coasts to send to London so there will be some impact, but probably not to the extent of the decline of the stock.  The point is that it is the uncertainty, not the result of the election that is moving the market and UP stock.

 

We’ve battled with a lot of uncertainty lately, and always will.  For if it is not “Brexit”, it is things like rapidly falling oil prices, oil spills, Greek worry, US debt downgrades, taper tantrums, Ebola, China worries or subprime mortgages.  This is just the newest uncertainty and there will be another in the future we can’t even predict.

 

It’s not fun, but we have to live with this unpredictability to generate return in the stock market.   It’s also part the reason we have pay the price occasionally with volatility.  This is why we plan the allocations so carefully, taking enough risk that we can earn the returns but not too much that we have to pay a price you aren’t willing to pay to sell and realize the losses at an inopportune time.

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850