Your Recession Primer

Mar 26, 2020 David Kennon

These are scary and unknown times.  But it won’t last forever.

-I don’t know why the media isn’t reporting this, but Israel says they are weeks away from a vaccine.

-There is incredibly positive data coming from the drug hydroxychloroquine.

–Remdesivir, in very small sample sizes, showed very quick improvement in sick patients.

-Due to high levels of self-quarantine, Codogno, one of the two coronavirus clusters in Italy, has reported significantly fewer infections per day

-China has also closed its last coronavirus hospital (there are not enough new cases to support them).

-Test results for the virus are now coming back in hours, not days.

-All of this is making us appreciate things we totally took for granted in the past.

As far as the stock market goes:

-The markets HATE uncertainty.  This is part of the reason for so much volatility.

-The stock market projects what they think may happen to the economy.  It does not reflect the economy itself but what the traders fear could happen.  These fears are usually exaggerated which is why often times the markets will rebound as situations become more clear.  Markets usually overreact both negatively and positively.

-The Aggregate Bond Index is positive for the year.  This represents thousands of bonds throughout the country.  This is common in a stock market downturn as people move money to very low interest bonds.  Most people older than 60, have bonds in their portfolio to balance out returns.

-Gold is down for the year, which is interesting, as many Americans believe it is a “safe” instrument in times like these.  I’ve discussed in the past why gold is generally a poor investment.

-”Staying the course” can be so difficult.  But selling low and buying high is the number one mistake investors make.

-I hear many of you say, “Why don’t we invest in medical stocks since they will have so much demand?”  The markets saw this coming weeks ago.  It is almost impossible to stay in front of everyone else.  By the time you realize a stock might be a good buy, that ship has sailed.

-I cannot emphasize enough the resiliency of the world economy.  While there may be a short-term downturn, this is not going to last forever.  Humans always find a way to bounce back. Every single time.

Be Blessed,

Dave

P.S.- If you want to encourage your friends, please share.

Don’t Underestimate the Human Spirit

Mar 16, 2020 David Kennon

When I originally wrote this article about a week ago, the markets had not yet hit the lows that we see today (Thursday).  I understand that there is a lot of unknowns out there.  This is scary.  I don’t want the tone of this article to sound flippant.  But the information holds true. —— I am going to try to separate irresponsible and  hyperbolic investing advice from legitimate resources which are acting as the voice of reason. I think one of the most important concepts on market capitulations in times like this is the concept of “myopic loss aversion.” The concept is very simple.  Losing money feels twice as painful as making money feels good. This is built into our DNA. Numerous studies have been conducted which reproduce this idea over and over again.  Losing $10,000 in the stock market feels far worse than making $10,000 in the market feels good. Remember when the stock market went up 32% last year?  It felt good, but it was not cause for you to dance in your living room.  Now that the stock market is going down, the feeling you have is so much stronger.  Some people lose sleep.  It hurts deep down. To quote Peter Lazaroff: “Myopic loss aversion is the idea that the more we evaluate our portfolios, the more susceptible we are to loss aversion….investors that check their portfolios less frequently are less likely to make bad decisions stemming from fear-based loss aversion.” Do not look at your portfolios.  Do not pay attention to what the stock market is doing (which is almost impossible these days- it’s on every screen in America).  The more you look at your statement the worse investor you become. Let’s look at what Vanguard has to say (probably the most highly respected name in the investing industry). “I know how difficult it is to see hard-earned savings diminish, but don’t be tempted to time the markets. It’s a losing strategy. Our studies have shown that chasing returns has historically destroyed 1.5% a year versus staying the course.” (Vanguard.com) “Even from the pre-crash peak in 2008, stocks are still up almost 90% over the past dozen years and a few months. Moreover, when you look closer, you can see a lot of spots on charts where stocks fell sharply since 2008.” (The Motley Fool)  “Resist the urge (to sell). Money is made at turning points, and the crowd is rarely right at critical moments. Why? Because 50% to 90% of daily volume is driven by the trading algorithms, not by human investors with long-term time horizons.”  (USA Today) “Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.”  (CNBC) “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.” (Warren Buffett) I have to admit, that in my 18-year career this is some of the most incredible volatility I have ever seen. As more speculators enter the market, the more they try to time the market, which makes the market act more like a roller coaster. But you are not a speculator. You are an investor. You understand the power of stocks of bonds. You understand that over the next 5, 10, 20 and 30 years a diversified portfolio of stocks and bonds will make money. I write these articles because I care about my readers.  While these are uncertain times, take comfort in the fact that the human spirit wins every time. Be Blessed, Dave Please share this article so that your friends can worry less.

Should I Sell My Stocks?

Mar 9, 2020 David Kennon

Clearly, with the current world situation, I am here to be the voice of reason.  You need to stay the course.  Let’s look at why.  There are logical and historical reasons, which I will address below.

But, first, I’m getting the same questions over and over again.  Here are the answers:

Common Question #1

“Dave, I’m taking money from my portfolio each month.  Do I need to stop that disbursement since the market is down?”

No.  Remember, we are assuming an average of 5%.  Did you get more money last year when the market was skyrocketing?  No. You get what a diversified portfolio has averaged for decades.

Common Question #2

“Am I being forced to sell stocks, which are temporarily down, when I need to take money from my portfolio?”

No.  Remember, the portfolios I design are made up of two buckets.  A stock bucket and a bond bucket. When stocks go down, bonds almost always go up.  If you need money now, we are sending it to you from the bond bucket.  Properly designed portfolios weather these storms because you can tactically determine where to take money from.

Common Question #3

“Do I need to worry?”

No.

Common Question #4

“Should I get more conservative with my investments until this all blows over?”

No.

I’m going to give you cold, hard data that will debunk the concept that timing the markets in this situation might help.  I want you to know that I am not remotely worried. I’ve been through this before and it always ends the same way. Betting against innovation and progress is ALWAYS a mistake.

Here is a profoundly important chart.

What does this mean?

The chart is pointing out that, over the past 20 years, the stock market has averaged 5.6% per year.  But if you missed the 10 best days, you would have lost two-thirds of the overall profits.  Think about that!  Out of 7,300 days, missing the best ten, you decimated your long-term returns.

You cannot time the market.  “I’m going to wait until things settle down.”  When is that exactly? After the market has two amazing days, or three?  Oops, you just messed up your whole life-long investment strategy.

Be Blessed,

Dave

Balanced Portfolios Do Not Crash

Mar 2, 2020 David Kennon

Market Update:

1. This sucks.  Nobody likes seeing this kind of market volatility.
2. The markets in the past thirteen months have returned over 35%.  It is easy to forget that.  You are just losing a small portion of what you just earned.
3. Dividend and interest income do not change when the markets go down.  The “money that the money is making” does not change.  I wrote an article about this last year.  Click here. 
4. Read the rest of this article.

Let’s go back to the basics. First, let’s get some historical perspective to extinguish any lurking fears like, “The stock market is going to crash, I’m going to lose all my money, and end up living under an overpass with feral cats as my only companions.”

The chart below reports factual returns of an investor who put 50% of their money in bonds and 50% of their money in stocks over the past 30 years. (Specifically the Barclays Aggregate Bond Index, and the S&P 500). This is not my opinion.

The article continues at the bottom.

1990	1.5%
1991	24%
1992	9.8%
1993	13.2%
1994	0%
1995	28.58%
1996	13.74%
1997	22.47%
1998	18.15%
1999	10.87%
2000	.15%
2001	2%
2002	-11.8%
2003	20.9%
2004	10.3%
2005	4.88%
2006	11.33%
2007	4.3%
2008	-20.81%
2009	24.64%
2010	11.59%
2011	7.34%
2012	13%
2013	15.55%
2014	11.95%
2015	.34%
2016	11.07%
2017	15.67%
2018	-3.50%
2019	23.28%

Interesting Takeaways

1. Wow! You can make a lot of money investing in diversified portfolios.
2. The portfolio went down 3 times in 30 years.
3. The portfolio went up over 20% 5 out of 30 years.
4. The portfolio went up over 10% 19 out of 30 years.
5. Remember, when investing in retirement, you normally do not invest all of your money in the stock market. Bonds are important, too.
6. 2008 ranks as one of the worst recessions since the Great Depression. You would have lost 21% in 2008 and MADE 25% in 2009. Let me say this in italics to drive this home: During the worst recession in modern economic history, it took one year for your portfolio to recover. One. Year.
7. I could actually extend this chart back to 1935 and the results are quite similar.

Why does it work this way?

Usually when stocks go down, bonds go up. Human beings are extremely emotional. When the stock market is retreating, it is common for investors to move their money into more conservative bonds (which is a mistake).

There is a famous study by Dalbar, Inc. which shows the difference between investor returns vs. actual market returns. The result? Investors, on average, make 5% less than the stock market actually returns. (source)

How is this possible? If the stock market returns 8% over ten years, why do actual human beings average 3%? I think you know the answer.

This is why, I believe, it is so important to work with a fiduciary. Most humans need an objective, non-emotional professional helping them stay the course.

No matter if you think the stock market is going to go up down. It just simply doesn’t matter. If you keep your head in the sand and withdraw around 5% of the portfolio for the rest of your life, you will be just fine. We have 200 years of economic history to prove this point. Bad stuff happens. Weird stuff happens. Change is inevitable. Wars, diseases, political upheavals happen.

But, you, as a member of the Retirement Revolution are going to reject fear-based poor decisions, and reap the rewards you deserve. You can do this!

Be Blessed,

Dave