Wealth management is often associated with the word “No”. Got any hot stock tips? No. Should we be investing like that guy on TV? No and a speedboat is not an investment. Being negative all the time is no fun for us either, so here are some things to be positive about.
In the last 10 years, we experienced the worst stock market decline since the Great Depression, but an investment in the S&P 500 at the market top still would have doubled your money. Since the financial crisis, experts have predicted an extended period of low single-digit returns for equities. Folks that listened to these experts missed out on a huge bull run.
Domestic equity valuations are elevated, but by much less than is commonly reported. The cyclically adjusted price/earnings (CAPE) ratio is the most cited example of rich valuations with today’s CAPE about 80% higher than its historic average. That average goes back to 1881, though, and using it as a timing device would have kept you out of the stock market since 1994. Comparing today’s CAPE to the average over the last 20 years, however, shows valuations only 12% higher than average. Again, this isn’t a signal to buy or sell stocks, but it’s a reminder that it’s never as bad as they say on TV.
Bad news is just fine, though. One of the symptoms of a bubble is euphoria. Do today’s news headlines look optimistic about anything, let alone euphoric? If there is a bubble in anything, it’s in depressing news! The stock market continues to climb a wall of worry while reporters recycle the same worries each year. A Google search for “stock market bubble” will yield results going back to at least 2010 saying the market is in a bubble.
You have an advantage. While professional money managers mark time in 3-month increments, you have the luxury of a long-term investment horizon. Their returns are under the microscope every quarter. Your returns compound to fund your financial goals. Their incentive is to not lose over the short term. Your incentive is to win over the long term. Time is the ultimate edge. You don’t have to be a genius or have an Ivy-league pedigree to succeed in investing. More than anything, it takes patience.
It has been nearly 18 months since we recapitalized Fairway Wealth Management, buying out our outside shareholder and making the firm 100% employee-owned. It’s been a positive stretch for our clients, with investment portfolios generally up nicely. And it’s been a positive stretch here, as we’ve continued to grow and expand our team and services. As such, I wanted to send you a brief update on some recent activity here at Fairway:
We’ve recently hired two new employees:
Franco DiLiberto joined us in August as an Associate Wealth Manager. Franco, a Baldwin Wallace University graduate and CPA, spent the first three years of his career as a tax advisor with a regional public accounting firm. He will be helping support a number of client relationships while starting to work on his CFP designation.
Sarah Romanini joined us in June as our receptionist, office manager, and client service associate, replacing Erica Robinson who moved to Texas with her family. While we will all miss Erica, we are excited to have Sarah aboard. A graduate of John Carroll University, Sarah spent the first 6 years of her career in social work, then spent the previous 5+ years with a private equity firm, serving as an executive assistant and office manager.
In other employees news:
Chris Martin passed the Certified Financial Planner (CFP) exam and is now officially a CFP. Congratulations Chris!
Laura Reifschneider has been accepted into the executive MBA program at Baldwin Wallace University.
Dina Leader has completed the education and certification requirements to reinstitute her CPA license.
In the community:
Kristen Kuzma recently served as the Pro-Bono Director of the Cleveland chapter of the Financial Planning Association (FPA).
Korby Collins is in her fourth year on the board and finance committee of the West Side Catholic Center, an organization that assists those in need with food, clothing, shelter, and advocacy.
Fairway will be an upcoming sponsor of the Northeast Ohio Polycystic Kidney Walk, an organization that supports Polycystic Kidney Disease, and RhizoKids Night at the Races, an organization that supports Rhizomelic Chondrodysplasia Punctata (RCDP). These are two organizations that are near and dear to Fairway employees Matt Garrott and Chris Martin and their respective families.
Fairway also sponsored two events over the past summer, Moving Day Cleveland for the Parkinson’s Foundation and the West Side Catholic Center’s Pancake Run.
Fairway now serves nearly 200 clients, residing in 22 different states, with approximately $1.3B of regulatory assets under management.
We have recently rolled out a “Next-Gen” investment advisory service, targeted at the children/grandchildren of our clients that may not meet our normal account minimums yet, but that have started to accumulate some wealth and would benefit for our independent and planning-focused approach. Please let us know if this service is something you’d like to know more about.
Fairway, along with our partners Charles Schwab and Black Diamond, continue to introduce new technology tools. Tools are there for electronic check deposits, online account openings and wire transfers, consolidated portfolio access and performance monitoring, an electronic document storage portal, and more. If you are interested in learning more, contact your advisor or reach out to Maria Hinton and her operations team.
As we continue to expand our team and as our employees get more and more experience with us, we further increase our capacity to serve additional like-minded clients. We remain open to accepting new client opportunities and most of our new client growth comes directly from introductions from our existing clients and our close advisory relationships. So we want to thank you for your continued trust and support and we wish all of you a prosperous and healthy conclusion to 2017 and beyond.
James Bond movies and the TV series Seinfeld are both classics and cultural touchstones, but the conflicts in these stories could have been resolved more quickly than they played out. Goldfinger could have just shot Bond instead of strapping him to a table under a slow-moving laser. Seinfeld episodes like The Parking Garage (the gang splits up to look for their car and hijinks ensue as they struggle to meet back up) would unravel with one small change: the cell phone.
Just because conflict could have been avoided doesn’t mean these aren’t great stories. They are great stories because of the conflict. We don’t want the murder to be solved 10 minutes into a cop drama. We want to see the struggle because that’s what we experience in the world each day.
This is why so many have been wrong-footed by the low volatility in the stock market recently. It shouldn’t be this easy. “Just” sitting in an S&P 500 index fund has felt unsatisfying. The S&P 500 hasn’t had a correction of 10% or more for over a year. We haven’t even had a drawdown of 5% in the last year. No secret underground lairs. No convoluted plot involving Art VanDeLay.
It can be tempting to poke a portfolio and tell it to do something so we can create a narrative for the movement. If we can resist that urge, though, we can be more objective and drive better outcomes. Leave the search for a plotline to the financial entertainers. After all, Seinfeld’s key was that it was a “show about nothing”. Your portfolio doesn’t need drama to be great, either.
The month of May marks the 7th anniversary of the first Bitcoin transaction, an exchange of 10,000 Bitcoins for 2 Papa Johns pizzas. Reaction to the trade at the time was mixed. There were many people who thought it was neat that someone finally bartered the digital currency for an actual item. Many people also thought the pizza seller got ripped off. While 10,000 Bitcoins was theoretically worth $41 at the time, there was almost no way to spend them outside of hooking up with a fellow enthusiast on an online forum. In 2010 the world’s entire mined Bitcoin inventory was worth about $1 million. Headlines say that if you had bought $100 of the cryptocurrency Bitcoin in 2010, it would be worth over $70 million today. Continue Reading →
Capital Group is pushing back hard against the passive investing crowd. They make the case that some basic screens (low expenses, manager investing in their own fund, etc) can reveal good managers. I agree with that. The screens I use at Fairway are kind of hilariously basic relative to the universe of modern portfolio theory statistics and Greek symbols I could choose from. You really don’t need to layer on too many filters before you get a list of a dozen or so good managers in any particular asset class. What I do take exception to is the ‘Why settle for average?‘ argument they put forward. The Capital Group folks are some of the brightest folks around and yet this is the tagline? I tackled this on my personal blog last year here and here. I also posted a direct response to the Capital Group marketing here.
No One Expects a 40% Return for the S&P 500 This Year
I defy you to find a pundit optimistic about the stock market. Is anyone predicting double digit returns? Low to mid-single digits seems to be the popular view among those shouting the loudest. Short term returns have been stellar as the S&P 500 gained almost 12% in 2016. Intermediate returns have been stellar with the S&P 500 averaging 14.65% for the last 5 years.
So we’re due for a hefty pullback, right? Let’s look at the time frame that’s important to investors.
Long term returns have actually been sub-par. The S&P 500 returned short of 7% per year over the last 10 years. The historic average is 10%. If the market is due for a correction because the short and intermediate numbers are above average, does it also have room to run to the upside over the long term?
As usual, Warren Buffett’s letter to shareholders of Berkshire Hathaway is a must-read. It is well known that he advocates low-fee indexing for most investors. As his famous bet with a hedge fund of funds manager winds down, Buffett unleashed both barrels on high-fee money managers:
“The underlying hedge-fund managers in our bet received payments from their limited partners that likely averaged a bit under the prevailing hedge-fund standard of “2 and 20,” meaning a 2% annual fixed fee, payable even when losses are huge, and 20% of profits with no clawback (if good years were followed by bad ones). Under this lopsided arrangement, a hedge fund operator’s ability to simply pile up assets under management has made many of these managers extraordinarily rich, even as their investments have performed poorly.
Still, we’re not through with fees. Remember, there were the fund-of-funds managers to be fed as well. These managers received an additional fixed amount that was usually set at 1% of assets. Then, despite the terrible overall record of the five funds-of-funds, some experienced a few good years and collected “performance” fees. Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains achieved by the five funds-of-funds were diverted to the two levels of managers. That was their misbegotten reward for accomplishing something far short of what their many hundreds of limited partners could have effortlessly – and with virtually no cost – achieved on their own.”
Punxsutawney Phil practices accurate ambiguity. The vast majority of the time, he sees his shadow. This portends 6 more weeks of winter, generally lining up with the Spring Equinox. What a great strategy. Winter usually lasts 6 more weeks so predict 6 more weeks of winter and most of the time you’ll be right. He does not predict exact temperatures or exactly when it will turn warm.
Contrast this with the investment world. The market generally goes up, but we seek out experts to comfort us with false precision. How much screen time is wasted discussing resistance levels, Dow 20,000, or predicting the S&P 500’s earnings? If you’re a long-term investor, none of this matters. What matters is that the market goes up over time. Like the changing of the seasons, the market has its ups and downs, but the harder you try to pinpoint these changes, the more likely you are to wind up wearing cargo shorts in the snow. Continue Reading →
We’ve witnessed the peaceful exchange of power in the most powerful country on the planet. Now, how do we create a “Trump Portfolio” of only the best, really the greatest, everybody says so securities? Does it make sense to overweight small cap manufacturing stocks that might benefit from a strong dollar or perhaps bank stocks to take advantage of rising rates?
Here’s a better question: What’s more important, the person in the White House or the person who owns the portfolio? It doesn’t make sense to put Grandma in volatile small cap stocks if what she really needs is income. Likewise, it wouldn’t be prudent for a 20-something to move everything to cash because they don’t agree with the President’s politics. I hope you already knew this, but there is no optimal “Trump Portfolio”. Rather than rebuilding their portfolio every time the winds change in Washington, D.C., investors should build around their personal needs and goals.\
The stock market started the year on the wrong foot with a 10% drawdown. It was the worst start to a calendar year ever and prompted knee-jerk reactions such as the RBS note for their clients to “sell everything”. At the end of June, the UK held a referendum on whether to withdraw from the European Union. “Bremain” was the clear leader heading into the election as “Brexit” was viewed as dangerous and sure to drop the markets into a tailspin. Brexit won. There was an election here in the United States which also had a surprise outcome. All three of these events were supposed to be harbingers of disaster. Instead, stocks went on a tear as the S&P 500 gained 12%. The city of Cleveland also got in on the action. The Cleveland Indians lost a heartbreaking World Series, but UFC, minor league hockey, and NBA championships were all brought home to the greatest location in the nation, defying experts every step of the way.
The S&P 500 has been up for 8 consecutive calendar years (kind of – 2015 was negative if you don’t count dividends), but like my dad says, “It ain’t the years, it’s the mileage.” Since the market bottom in March of 2009, the S&P 500 has experienced a cumulative 287% return. For some perspective, it gained 450% from 1991-1999 so our current bull market has not climbed “too far, too fast” as some may argue. There is an old Wall Street saying that the market takes the elevator down and the stairs back up. Maybe it should be revised as we’ve been strolling up a ramp for the last 8 years. Looking back, it can seem like the recovery has been a gentle walk, but this slow stroll hasn’t been without its hiccups. During the recovery we’ve had 4 corrections (10% or greater drawdown). Each of these was supposed to be the end of the bull market so congratulations if you didn’t get scared out of your allocations.