Fear Is Not An Investing Strategy!

In recent days, the airwaves have been inundated with all things COVID-19! At the time of writing this article, the infectious disease had not been reported as a pandemic but may be on its way. It is often the mistake of many individual investors to attempt to know the movements of the stock market. When a disruptive force gives the markets an opportunity to correct, investors not only help the market correct but substantially contribute to the degree of correction. One method of assistance is the overwhelming and uncanny ability humans possess for allowing fear to grip their lives so dramatically that bad decisions are turned into horrific decisions.

At the turn of the new year, the coronavirus began its assault on the people of China. We can debate whether the communication and unified efforts of the Ministry of Health of the People’s Republic of China and the World Health Organization (WHO) may have stifled the transmission of the disease. The fact is that this strain of coronavirus has spread rather quickly from one hemisphere to the next arriving in our nation on the west coast.

What does this information have to do with investing, you ask? Fundamentally, the same companies that achieved record profits in 2019 are the same ones that investor are now selling because of potential supply line delays or collapse. China provides a significant amount of goods to the Unites States. However, the companies that purchase their primary inventories from China for further manufacturing their products in the U.S. continue to hold substantial cash positions on their balance sheets, enjoy full employment of their workforce and, as mentioned earlier, know how to make a profit.

So, what is all of the concern about COVID-19? First, the ability to cope with unknown environmental infirmity by individual investors is almost nonexistent. Two emotions drive most of the market purchases and sells – fear and greed. One of the most often quoted statements of wisdom about these emotions was coined by one of the greatest investors of our lifetime, Warren Buffett. He said, “It is wise to be fearful when others are greedy and greedy when others are fearful.” The markets’ precipitous drop, as reported by the S&P500 and DJIA, for the period of February 19 through 28 can only be explained with fear. Stocks that were successful and reported good growth in 2019 were now being liquidated so quickly the indices reported an 11% drop meeting the definition of a correction.

Understanding that people are concerned about their overall investment portfolios, I recommend they revisit their purposes for accumulating the investments. If you have a change in your long-term need, your physical well-being has improved or declined dramatically, your family has received an unexpected windfall of assets – these are valid reasons to rebalance your portfolio to reduce risk or increase opportunity. To attempt to time the market by simply selling out after the decline of the market only converts your unrealized loss to a realized one. In country terms of my father’s remarking, “that is about as wise as shutting the barn door after the horse has left the barn.”

The better approach to protecting your family’s long-term investment savings is to make decisions out of unbiased research and analysis. Study the fundamentals of the markets and set a level of expected risk that will trigger the time of rebalancing instead of allowing fear to drive your decisions and possibly cost your family the security you desired in the first place. 

If you feel that you can’t make the decisions necessary to stay the course of your original investment approach, seek out a Certified Financial Planner™ professional and ask for a complimentary consultation and stress-test of your portfolio. You may sleep better at night.

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What Is Causing All of the Market Volatility?

Have you noticed your retirement portfolio activity looking like a bad EKG? Market fluctuations have been extreme the past few months. This type of market experience is a test of your investment philosophy and willingness to “stick with your approach”. 

Many different factors create market volatility. One area that causes market concerns is the geopolitical risks faced by investors. This type of risk is controlled by policy of the U.S. Government and its leaders. The impact of geopolitical risks can be significant to our economy such as the tariffs currently imposed on a few of our trading partners. These countries have maintained a rather fluid trading program with our country and, due to the recently imposed tariffs, the cost of goods flowing from these countries to the U.S. are much higher. The purpose of the tariff is to persuade the trading partner to amend trade agreements on a more equitable basis. For example, the U.S. imports a significant number of consumer products that are considered necessities for Americans (i.e., electronics, appliances, clothing, etc.).

By forcing tariffs on the imported goods, Americans will consider alternatives that may be produced in the U.S. or another country that is not, currently, burdened with a tariff. Too often trading agreements become one-sided or inequitable. This simply means that we are importing far more in foreign goods than we are exporting to our trading partners’ countries. An imbalance results from this these transactions called a trade deficit. The role of the current policy makers in the U.S. is to create a balance of trade (i.e., our imports equal exports).

A concerted effort by the U.S. Congress and President determine the fiscal policy of our nation. This policy is primarily affected by two main tools – taxes and spending. Congress establishes, or approves, the appropriations (or spending) on various programs and it is ultimately signed by the President. Different approaches to the budget can cause significant market fluctuations. For example, if the Congress increases spending in the defense sector of our economy, the market may interpret this action to mean defense stocks could see a growth in the coming years. The inverse could be true if Congress were to reduce spending on defense. Social programs such Social Security and Medicare consumes a majority of the annual federal budget. These commitments to the participants, who are beneficiaries of the programs, are strongly defended against cuts in spending due to political will.

The Federal Reserve Board controls the monetary policy in the U.S. This regional banking system is responsible for the management of our banking processes and the supply of currency within the system. One of the most critical functions of the Federal Reserve Board is the gathering and interpretation of economic data to determine inflationary impacts on the domestic economy. Our current market conditions have created a prolonged lower interest rate environment and, coupled with the tariffs, a strong U.S. Dollar. Inflation has been relatively controlled through the efforts of the Federal Reserve Board members.

By developing a strong, long-term plan for investing to meet your goals and objectives, you should not be ruled by the recent volatility. Too often, investors react to volatility by trying to time the market. This approach could lead to a catastrophic ending for your retirement plans. If you are concerned about your current investment strategy meeting your needs, seek out a Certified Financial Planner practitioner to assist you with a “second opinion”. The only thing you have to lose is worry.

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The Best Index to Gauge the Performance of Your investments

The DJIA, S&P500, Russell 2000, Nasdaq Composite, etc. There are hundreds of indices that report on a variety of investments. Which is the most appropriate for your family? How do you know if your investments are performing in a manner that will help you reach your goals? Keep reading, we have the answer.

While assisting our clients in reaching their retirement goals, we use our proprietary LifePlan SolutionTM process. An outcome of this process is a special index we use to provide our clients a better understanding, not to mention an easier process for monitoring their assets, by computing a unique index – The Family Index.

Your family is unique. Your tolerance for risk, cash flow needs and goals for the future may or may not require investing your lifetime savings in the same manner as the aforementioned indices. We apply our process to your family’s cash flow needs over its projected lifetime and determine the needed return to accomplish your goals. As simplistic as it sounds, the process is quite easy for our clients to understand and, more importantly, confidence is maintained because they realize it is particularly tailored to their family’s needs.

Discipline to adhere to the plan is necessary for your family to truly benefit. When the markets are reporting 10% returns for the year and your portfolio achieved 7%, it is vital to remind ourselves that you didn’t participate in the negative year so deeply nor the highs of the current year. Additionally, your family is most likely not 100% invested in the stock market as represented by the DJIA or S&P500.

Recent market performance has been setting record highs. All markets move in cycles. If you wish to reduce the volatility in your family’s investments, it is critical that you allocate the assets in a manner that meets your risk tolerance and other qualitative needs. Many of our clients appreciate the process mentioned above but seek guidance on a continuous basis to make certain any plan modifications required by changes in their family’s needs or desires are properly and timely addressed.

One of the most critical mistakes we have witnessed clients performing is market timing. It has been scientifically proven that the average investor is not capable of investing in a manner to predict the rise and fall of markets. Don’t fall into the trap of listening to “water cooler” experts that “know how to beat the markets”. Too often the “expert” has been proven wrong but your family is the one that pays the price for the lesson learned.

The Family Index is one tool we utilize in an arsenal of tools to help your family realize its dreams. Don’t attempt short cuts and expose your family’s future to gambling on market timing. Seek out a Certified Financial PlannerTM practitioner to help you prepare, implement and monitor a plan that is sound and provides your family with confidence about the future.

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