History has a way of not exactly repeating but rather rhyming. That also generally plays out in the stock, futures, bond and other investment markets. Look at the chart below. Investors and traders have been trying to predict tops and bottoms of a general investment market for more than several hundred years. I wish I could tell you that I was especially gifted at predicting the future on an exact date or point in the market, but that is not the case. If anyone could predict the market shifts with pinpoint accuracy it would still be easier, cheaper and more profitable if someone could predict the winning lotto numbers.
However, there is a difference between predicting lotto numbers and how the market performs. Humans are responsible for the overall market direction and generally, humans have not changed much in thousands of years. Sure we've got new toys and have landed on the moon, but we are still a population of people that respond to fear, greed and love. What that simply means is that the markets are generally a lot more predictable than inanimate objects flying around in a big bubble looking for a way out.
As humans, we tend to get fearful of both extremes in the market. When the market is dumping daily into the black abyss, close to previous market lows, we tend to let our imaginations run with panic that this could be the time when it truly collapses. And when the market is soaring to the sky and approaching the heavens close to previous historical market bull runs we tend to get nervous that the end is near. But to our often surprise when we get so confident and certain that nothing can stop the downward or upward momentum it often turns against our expectations and proceeds to fool the majority.
Even the best investors of all time have been fooled many times and hammered with losses. But one thing I have learned from those great traders and investors, before and now, is that as humans we tend to push the envelope on everything we do. I almost buy into the fact that as humans we just can't stop our selves from jumping off cliffs just find out what it is like.
So what does all this mean, you may ask? For one, when the candy stops being handed out you can be certain there will be riots and stress in the market. Investors are going to push the market envelope till it pops just to make sure it cannot go much higher. And that usually means the once calm and lack of significant volatility (i.e. how much the market moves around daily) will certainly change. Which I believe started last February. Secondly, when the general market volatility increases it often plays significantly on the fears and safety concerns of individual investors. It is often that this volatility exposes bad investor behaviors and as a result starts to shake out these bad investments. If only a few are caught in this shake out then the market will only temporarily make adjustments and then continue its trend. However, if the majority have made bad investments then the market will start a market plunge until the bad behaviors are expunged. And sometimes this process of expunging bad behaviors irreparably damages good investors as well.
So where are we now...? I guess that depends on your view of how much more candy can be handed out till its all gone. You can see from the chart above we are stretching into historical market highs, but the 1990's also show that the previous norms can be violated significantly. My view is that the market is hoping to see the 1929’s and 1990's all over again even if that means living in market non-reality and that type of hope is often not rewarded.
I expect now is the time to start putting your house in order and paying down any debt you have, because the tidal wave that is approaching will not be navigated with a boat full of lead weights (debt). The probabilities and pressures are mounting that you should know in the next year or certainly within the next couple of years whether your financial planner, wealth manager, investment manager or your disclosures with them was worth the weight in gold or not. I would be asking your investment professional what their plan is to navigate the next bear market and if they don't have a plan then ask them to develop one. Good relationships are hard to find so first do everything possible to keep the relationship strong. Only rethink the relationship if they refuse to develop one that you are comfortable with.
Your comments and thoughts are welcome…
Continued from the Last blog …..
But regardless of our profile, thoughts usually creep in with a focus on how we can possibly live off the savings we’ve put away. And the scary question to ask is “What if I discover later that my savings fail to support my retirement, what do I do then?” As we answer that question, we acknowledge that fewer employers want to hire individuals our age and we are less likely to earn the income we now depend on if we go back to work. This simply makes us ask the next question “what happens next if I quit my current occupation?”
If we happen to be closer to the “Extreme Spender” leading up to retirement, then the common decision is to likely stay put in a job we no longer feel challenged or wish continue. The other not so popular choice is deciding to downsize expenses such as vacations, house size or entertainment until forced to do so. In this case, it's very apparent why we would not want to spend our savings, but what is not apparent is why we would resist spending clearly when we have more than enough savings for retirement.
But let's assume that we have saved enough to fund our income needs after retirement. This would possibly mean we have been a better saver vs. spender. Let's also assume that either we worked through our financial plan with an advisor or alone and determined that we financially can continue or even improve our pre-retirement lifestyle.
So why do I see retiree’s in this situation continue to experience a fear of spending during retirement? I’ve come to believe it has to do with how they viewed their savings during their career. Savings for many investors represented a safety net in addition to their current income generator. So during their career, if anything happened to their income they knew they could dip into their savings until they found the next income generator. Therefore, when retirees leave their income generator and replace it with their savings they emotionally no longer feel they have a safety net. This leaves the constant concern and fear of spending that often disrupts the enjoyment of spending.
Often one solution to solve this dilemma is to build a safety net into our investment/savings that again allows us to sleep at night. One suggestion for a safety net could very well be paying off our mortgage. To find our safety nets I would recommend thinking about the “what if’s” and have plans for those situations. Will the future go according to how our “what if” plans indicate? Often the answer is No. However, I can tell from experience that it's easier to modify previous “what if” plans than it is to create a solution on the fly from scratch while under pressure.
And to my business owner readers, I would tell you that planning your retirement is often more difficult because it’s likely 85% of your income will be based on the value you receive from selling your company. And determining the sale value is not an exact method. You may find yourself also carrying part of the sale value in a note to the buyer. This also adds another dimension of risk to your retirement income vs. employees retirement income.
Your comments and thoughts are welcome…
Years ago I received a call from a client, worth 36+ million dollars with a $300,000 a year pension distribution and only used half the pension annual payout, asking if it was going to be ok to spend $250,000 on a recreational vehicle.
One large difficulty with retirement is the challenge and fear of leaving the income generator, whether it be our business ownership or job, and relying on the fruits of our savings. As we get older the fears of change continue to grow relative to our vulnerabilities of income security.
The journey following the start of our young career often leads us to get married, have kids, buy a house, buy more expensive vehicles and essentially depend more on the increase in income we receive from promotions or business growth. Early in our career, we tend to ignore that the future could be any less ideal than our incredibly optimistic vision of the future. When we are young we can allow ourselves to leave a job and pursue another job in hopes of bettering our lives. If the job or career fails to turn out, like we hoped, then we have the ability to continue looking for better possibilities.
Some individuals, “Extreme Spenders”, spend every dollar earned to experience life and believe that better jobs tomorrow will eventually make up for the lack of planning today for retirement. The difficulty with betting on higher incomes in the future is the lack of better-paying jobs the higher we progress up the income ladder.
On the other end, some, “Extreme Savers”, believe that life is unpredictable and save every dollar they earn and don’t spend but on absolute necessities. The difficulty with saving every last dollar is that we don’t really get to experience things like travel, entertainment, and vacations.
Somewhere the rest of us fall in between both extremes. And the closer we are to one extreme viewpoint vs. the other is often dependent on the sensitivity to the fear that the future may not look like our beginning optimistic vision. Also the closer we are to the “Extreme Saver” profile during our career the more likely we will have the necessary funds to continue the lifestyle we have come to enjoy. However, the closer we were to the “Extreme Spender” profile during our career the more likely we will be required to work longer or decrease our current lifestyle during retirement.
This is important to understand, as somewhere along the way, as we get closer to retirement the realization starts to sink in about the cost of all the things we have come to depend on. Things like a big house, expensive nice cars, travel, entertainment, hobbies, and vacations. As the income generator starts to stall or go away the fear of transitioning to living off of retirement income exclusively starts to elevate.
Until next…(Part 2)
Should I try a do-it-yourself approach when beginning to invest .... or hire a financial advisor? Depends??
Below was my reply to another question I answered today on Investopedia. It's a great resource for answers. I hope this helps in your pursuit of investment knowledge.
"Your question holds a couple of interesting concepts. Should you do-it-yourself? How should you invest if you do? The first question is often asked to save on the cost of an advisor.
But what if an advisor was free, would it not pose another question? Do you love to invest and spend your time doing that? If you answer yes, then I would suggest you pursue the do-it-yourself approach. But if you do, then you should really spend the time to self-educate yourself and have patience developing a strategy that fits you.
Using an investment advisor or any professional should be a decision on added value. I use advisors for more experience or just because I don’t want to spend the time and effort myself. How much is your time worth? It’s just a simple cost-benefit analysis on whether to use an advisor. It’s really no different to why a business owner hires employees.
On the second question on how to invest: Over the years I’ve seen thousands of different strategies and a lot of them are useless but then I’ve seen a large amount that gets the investor to their goals. The ones that are successful are usually built around similar principals. I’ve found after 20 years investing for clients and myself that the only strategy that matters is the one that you like that gets you to your goal.
Everyone has a strategy they think best about how to fill a dishwasher, but I only care about the dishes getting clean. If the dishes don’t come out clean then you need to change strategy. Sure, someone can always find another way to include a couple more dishes, but do you care?"
Your questions, comments and feedback are always welcome!
All the best,
I was responding to a short article request from a large newspaper, but when I emailed my reply back to the individual requesting it, I discovered the individual had left the company. So, I have decided to post the question and my short answer here on my blog.
Parents should ask themselves a couple of questions first, “Will this assistance put us in financial difficulty?” If no, then ask the next question, “Is my kid responsible with money?” It may be a good idea if the first question is a “No” and the second question is a “Yes”. If the answers are reversed then it will be a complete disaster for the parent’s retirement and often ends worse for the child as well.
Years ago, I oversaw a couple of parents that paid the mortgage down payment for an irresponsible child (parents definition not mine) and the child kept taking out equity to spend until they eventually lost the house. I’ve also seen where parents that gave a down payment as a wedding gift to a responsible child, years later, unexpectedly received it all back plus more in a thank you card.
Had the first parents left the irresponsible child to renting then it might have saved the child from a mortgage default on their credit report. “As I say often to parents, What are the intents and likely results?”
The last several days in the US market has been a bit of a shock to lots of investors. History has had many surprise events such as the unexpected 1987 super US Market crash. Anyone connected to the markets in some way back then can remember it as easily as those who remember the assassination of President Kennedy. Not too many years ago, we had the "Flash Crash" that saw a 1,000 point swing in the Dow Jones. The main difference I see in markets from years ago and the markets today is the movement of markets around the world all trending in the same direction.
I've talked about this for several years now but I thought a graph below of today's market returns would do a better job of describing what happens when one country's market goes down. Many many years ago this was not the general case. When one country's market went down, other countries markets might be down or up.
The simple reason for all markets trending the same has to do with the fact that companies are now doing business in other countries. When business slows down in a country they are doing business then this affects their bottom line and investors care about the bottom line. So when expectations of a company's revenue are perceived to go down then investors in the parent country trade the stock with those expectations. Essentially now everybody is in everybody's business around the world. The world economy is now acting like what one country's economy used to do.
Trade according to the big movements and investing will be less of a surprise.
This is just a short quick observation. Other than Octobers increase of 968,000 people to the bucket of those who quit looking for work according to the Bureau of Labor Statistics (BLS) the last two months have been really dull. I keep wondering how the BLS can keep 10.9 Million extra people in the bucket who quit looking for work (Not in the Labor Force). The extra expanded from 2.2 million in 2007 to 10.3 million in 2013 and has stayed relatively the same since. Right now that total number is 95.5 Million, but if we adjust for normal percent of the population then the number should be 84.5 million in that bucket. The good news is that at least the extra bucket has not significantly been expanding in the last four years. But why has the number not been decreasing?
How do eleven million people give up looking for work? I have a hard time imagining that many people don't want to work and/or are too discouraged to work. If I had those extra eleven million back into the unemployment numbers then the true unemployment percent is 10.2%, not the wonderful 4.09% reported. Of course, I'm probably making it too simple, right?!
A number of months ago I was asked by Investopedia.com to join many other advisors to answer questions posed by investors looking for direction. This evening I responded to a 66 year old who retired in February of this year. There seems to be only two different types of investors posting questions. The first type is searching for information to go it alone and the second is the type that is trying to understand enough information to find a good advisor. However, many post questions that allude to "going it alone" when they are uncertain whether to "go it alone" or hire an advisor. So the answers to their questions really do not address their objectives and essentially increases their time spent figuring it out. So I thought I would post a copy of my response in this blog as well. In fact I plan to transfer many of my replies on Investopedia.com since most of my replies are more general in nature and I feel very helpful to investors asking the better questions.
"What you pose is a great question “how do I maintain this income stream”. Years ago, when I first entered into the investment world I kept thinking there was a Holy Grail method to be discovered. Many years since I have found that there are probably more investment methods and tools to accomplish investors goals than investors to trade them. However, I found that the success of each method had to rely on universal fundamentals, but more importantly, the method and tools used had to match the viewpoint of the investor or advisor for long-term success. (i.e. if the investor doesn’t believe in using stocks for investment then the least amount of negative market returns will cause the investor to likely sell too soon or some other negative actions).
If I were you I would decide whether you wish to use an investment advisor for advice or go it alone. If you go it alone I would recommend that you should probably reduce your stock exposure and bond maturity length to mitigate a downturn in the stock market and a possible increase in interest rates (bond values go generally opposite of interest rate increases) till you learn a bit more how markets work. Then at some point, you will need to make your method your own. I will caution you to have patience with yourself in learning.
However, if you choose to find an investment advisor I offer you that many advisors probably could get you to your goal. Just understand that you are borrowing their methods, so your responsibility is to hold them accountable to their method and not to instruct them on how to do their job. If you find yourself instructing the advisor it’s probably because you are not confident in their method and/or advisor’s ability. When this happens you should cut your loss and just go find another advisor or method. Think about it like if you had a subordinate you continue to have to micromanage. It will drain you and you would probably be better off just doing the task yourself.
Once you decide which path to take it will be easier to decide on more questions to ask. Good luck and keep asking questions on Investopedia.com. It’s a great resource for investors. "
Your feedback is welcome!
I've heard it so many times, "Why does this not feel like things are really not ok?" Usually that is in the context of economics in the USA. Here in Colorado I have to say that things locally have been doing extremely well with housing prices again going crazy up over the last few years. I seem to hear about startup companies coming out every single day. And it is easy to get caught up in linking the local economic success to the nation as a whole, but here I have to show you a couple of charts that I've updated each month for the last 10 years.
Both charts are built with the unemployment numbers the labor department publishes each month. The chart on the left is based on the reported unemployment percent, while the chart on the right adds back in the "Not in Labor Force" #s minus the historical average % relative to population #. Which just means I add back in the abnormal amount of unemployed individuals that do not belong in the "Not in Labor Force" bucket to get a true unemployment percent. It's rather simple math and logic, but it shows a very different picture.
It may explain why Denver is bringing in out of state families from all across the United States to come work here. I see a minimum of 8 to 10 out of state license plates a day just driving around. I usually only see that in the summer months but now its constant year around. Economics are not well nationwide and families are moving thousands of miles seeking jobs they used to be able to find within a hundred miles.
The real unemployment picture is not what everyone would wish to see and the reported picture I'm sure has had some positive effect of building back the confidence of the population, but for the investor it holds a concern. And that concern is this, "If the government cannot give a more accurate picture with the unemployment numbers how confident can we be in our economic fed picture?" I encourage you to do your own observations. I cannot predict market turn points with any accuracy, but when things start to make less sense for a long time it usually means a time will come to balance the equation. Just have a strategy for when the market goes up, sideways and down.