In many ways, the past few months have signaled an inflection point in the financial markets…a time where a change in pitch or tone can be seen. Of course, as Americans, we have inflection points every four years in the form of elections for President. I thought it might be useful to answer some of the questions that we sometimes hear from clients (and prospective clients). Some of the answers may surprise you.
- Can you help me determine when to exit the market? I “can’t afford a market loss.”
We believe that markets work. Investment returns don’t necessarily happen smoothly but rather they can occur quickly. You “have to be present” to win. You should invest within the context of a financial plan and the plan should point towards your reasons for investing… your long-term goals. Invest on purpose, for a purpose.
Every client has different goals but the commonality is that everyone is a “full-time investor”. That is, we don’t try to time the market by entering and exiting based on short term “noise”. Trying to “outguess” markets is a classic, well-documented mistake that requires two correct decisions, when to exit and when to re-enter.
Thinking that you can totally avoid market losses is unrealistic. Normal market variability, however, is not a “loss” unless you sell out. For most investors, this statement should be reversed to read, “I can’t afford not to be in the market and capture long-term premium returns. Again, remember your “why”.
- Are fixed immediate annuities a good way to obtain a guaranteed return?
Well, even the stated objective is bad. You are willingly accepting lower returns (along with a whole bunch of fees, commissions, and expenses), in exchange for a “guarantee” from an insurance company, the quality of which varies widely. Some people are attracted to annuities because of the income “certainty” and because they want to avoid losses in the market (See #1). Ironically, because of the huge sales commissions (sometimes north of 8%), a “loss” is essentially locked in at the time of purchase…at least for several years. The insurance company is paying you back with your own money for the first 10-15 years. The timeless wisdom of Voltaire comes to mind, “Doubt is not a pleasant condition, but certainty is an absurd one”.
- The country is going to Hell; The Fed has pumped up the economy and the stock market; Should I be concerned about my investments?
As a student of economics, I find it interesting that many investors are self-taught experts on monetary policy and the incumbent outcomes. I must confess that every time I catch a snippet of a Federal Reserve press conference, I visualize the “Wizard” turning the dials and knobs in The Wizard of Oz. Central banks throughout the world are much less a factor today than at any time in the modern era.
To suggest, as some commentators have, that the grand majority of the stock market increase since March 2008 is because of the Fed is, in my humble opinion a facile argument. In fact, the rebound over the past several years is attributable to earnings and dividends increasing. This has been the cause for previous market increases and is very likely to be the cause for future increases.
As for the unsustainable debt levels in this country and many others…yes, one day it will stop. It will be fixed, but probably not until it is a genuine crisis. No reservoir of political will exists to take meaningful action until then. Capitalism and the free markets resulting from capitalism will continue to work. Investing is, after all, a forward-looking optimistic act and will continue to reward those who participate. You must have some degree of faith in the future as an investor. Resist the pessimists, (that prey on the emotional triggers in our brains), and stay the course.
- Can I achieve market returns without having to endure market volatility?
The short answer is no unless you are very lucky of course. Warren Buffett has said, “ The stock market is a superbly efficient mechanism for the transfer of wealth from the impatient to the patient”. The unalterable truth is that the difference between what markets freely provide, (investment return) and what most investors actually accrue, (investor return) average more than 4% per year. That is, behavior …impatience robs many investors of a substantial portion of the available return.
- A broker- “advisor” friend showed me a “perfect investment.” What do you think?
One of my finance professors used to describe this scenario, as “There are Only Eight Ounces of Juice in an Orange”. Imagine the main investment components such as income; liquidity; capital appreciation; variability; and tax benefits. Each of these represents ounces in the glass of orange juice. If an investment has six ounces of current income, there are only two ounces remaining for the other important components. The “perfect investment” likely claims to have more than eight ounces… something that isn’t possible. Ultimately, risk and return are related.
I am Roman Catholic and in the liturgical season of Easter, (that we are in now), many of the readings are from The Acts of the Apostles. These readings describe the actions of those followers of Jesus, once they believed. The central theme that runs through the five questions above is that we have to come to believe in the philosophy before we can accept what has to be done to ensure our financial future. Ready for a real conversation?