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Election Years and Stock Markets

Every four years, we get a lot of the same questions about elections and the stock market. In one form or another, people are generally asking how the market performs during election years.

The graph at the right shows average market performance for each year of a presidential term. As such, the market will grow at 6% this year, right?

To see how well the average returns stack up to reality, let’s review the S&P 500’s performance from the last two Presidential cycles.

Election Years2008:   -37.00%     Election year
2009:   26.46%      Post-election year
2010:   15.06%      Mid-term year
2011:   2.11%        Pre-election year
2012:   16.00%      Election year
2013:   32.39%      Post-election year
2014:   13.69%      Mid-term year
2015:   1.40%        Pre-election year
2016:   ___???      Election year

In comparing the graph and the data, the historical averages don’t tell us a lot about what we can expect from the market in a given year. While the averages tell us pre-election years are supposed to be great for investors, 2015 was the first pre-election year since 1939 that the Dow ended negative.

Averages are facts based on historical data, but are not very helpful in telling us what will happen in the short-run. In order to ensure you earn the averages over time, however, you have to live through the lulls to ensure you are in the game for the booms.

After a largely sideways year in 2015, the new year has started off horribly for global stock markets. Several news sources have pointed out that the 5% plunge in the first week of 2016 was the worst start to any year since 1928. Since then, the march downward has continued into correction territory (a decline of 10%).

Drops like this certainly do not feel good, but the way this year has started is also irrelevant in terms of guessing where the year will end. After that terrible start in 1928, the index actually ended the year with a 32% advance.

Famed investor, Shelby Davis, once claimed that “you make most of your money in a bear market, you just don’t realize it at the time.” Davis knew that down markets inevitably lead to people losing faith in the market.

For the long-term investor, downward volatility provides opportunities to buy quality stocks at bargain prices, provided you have cash / high quality bonds set aside to do so. Rest assured, you do…and that is precisely what the rebalancing process takes advantage of. However, it takes patience and time to come to fruition.

At the end of the day, we don’t know where the market will end the year. What we do know is that election years are very emotionally charged, so we expect markets, political commentary and media headlines to continue to be volatile. As always, cooler heads will prevail. Brace yourself for a volatile year, and know that we will keep a cool head throughout.

Mr. Market Has Quite a Temper

quote-mr-market-is-kind-of-a-drunken-psycho-some-days-he-gets-very-enthused-some-days-he-gets-warren-buffett-113-85-82I had planned on writing this week about the fact that 2016 is an election year, and that the only certainty we have about any election year is that it is going to be emotionally charged and full of uncertainty. Given the way the stock market opened 2016 this week, we’ll stick with investing for this blog.

However, take a moment to click on this link and read the article I wrote for the Star Tribune in November 2012, on the eve of the last election day. If I can predict anything with a high degree of confidence for the year ahead, it is simply that this election cycle promises much of the same things we experienced in 2012 – if not worse – so brace yourself for a wild ride. Refer to this article often. I promise it will continue to be relevant and useful throughout 2016.

I hope all of you have had a better start to the new year than Mr. Market has. He has been one ornery fellow the first week of 2016 (probably because it is an election year, which means it is a leap year, resulting in an extra day for us all to be tortured by political bantering).

I have not referenced Mr. Market for the last couple years, so while some of our longer-term clients may remember him, he always warrants an introduction.

In the investment world, we were first introduced to Mr. Market by Benjamin Graham in his 1949 book, The Intelligent Investor. Graham’s mentee, Warren Buffett, still calls this book “by far the best book on investing ever written.”

Further he states that “chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years. I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.” Chapter 8 is devoted to Mr. Market. Continue reading “Mr. Market Has Quite a Temper”

Summer Market Volatility

strategy-graphThe last few days provided a not so subtle reminder that there is real risk investing in stocks. However, the true risk lies in how you react to the pit that formed in your stomach as global markets dropped.

You see, that pit is our body’s biological response to fear. We are wired to seek safety when we feel threatened. As abruptly as global markets dropped the last few days, it is normal to feel threatened.

While that reaction saves us in many aspects of life, it is one if the primary causes of the Behavior Gap we talk about so frequently, and that we are seeking to avoid with our investment philosophy. The proper response to these movements is already set in writing within the pages of your Investment Policy Statement.

Carl Richards Sketch - Greed-Buy Fear-Sell Repeat Until BrokeThe other common cause is a desire for greater returns than your risk profile can handle. Over the last 6-12 months, many of you have asked about increasing your exposure to stocks given their excellent performance the prior 5 years and the agonizingly low interest rates on bonds in today’s environment. Let the last few weeks be exhibit A for why we stand firm and resist those calls to change the risk composition of the portfolio, in good times and in bad. You can’t buy last year’s returns.

In reality, markets drops like this are more common than most people realize. While these drops generally do not occur over the course of a couple days, they happen quite regularly. We have not experienced a drop off this magnitude since 2011, so we start to think this is rare. In reality, we were overdue.

Market Volatility TableThe market needs an occasional shock. It is healthy. In recent years, the amount of leverage in the market has grown significantly as traders have ignored the lessons from 2008. Shocks like this help flush out that leverage and bring it back down to more reasonable levels. They also remind investors there is risk in investing, and managing the risk level of your portfolio is far more important than picking the perfect investments or beating / matching the returns of an arbitrary index, whether that is the S&P 500 or the Dow.

Today, the underlying economic situation is significantly better than 2008. And remember that your portfolio is built with the most academically sound principles available. It is designed not only to survive these shocks, but to thrive as we emerge on the other side if them.

We are in the process of rebalancing portfolios that have seen its stock allocation drop outside of our targets. However, in the midst of this drop, many portfolios have not even deviated enough to warrant a rebalance. We will keep you posted as it happens.

The Financial Crisis in Greece

Weston Wellington of Dimensional Fund Advisors discusses the crisis in Greece and its impact on you and your portfolio.

2015 Q2 MARKET REVIEW

Greece – Round 3

GreeceThe month of June closed with a sharp global market decline over the last two weeks of the quarter on news out of Greece. Banks and markets throughout the country closed the last week of June after Prime Minister Alexis Tsipras announced he was calling a referendum on July 5 to determine whether to accept the terms offered by Greece’s international creditors. Greece voted “no” by a wide margin. Unfortunately for Greece, since then, its creditors stuck with their warning that they would have to accept harsher terms if the vote failed. With its back against the wall, Greece accepted.

If you think you’ve seen this movie before, it is likely because the Greek debt crisis started in October 2009, when Greece announced it had been understating its deficit figures. That spooked investors, and by spring 2010, Greece was approaching bankruptcy. To avoid a default, a coalition of mostly European countries issued a bailout. This bailout had some strings attached, specifically requiring budget cuts and tax increases. Greece did not improve and required another bailout in 2012 with roughly the same terms as in 2010.

Since the 2012 bailout, news out of Greece has been mixed. On the plus side, by late 2014, Greece was finally spending less than it was collecting. However, the Greek economy is still in very bad shape. It is smaller today than it was in 2010. Unemployment is north of 25% and much higher for young people. In 2015, Tsipras was elected based on the promise that he would be able to renegotiate with Greece’s creditors. Greece has announced it will stop paying some or all of its debt unless there are changes to the terms. Continue reading “2015 Q2 MARKET REVIEW”

How U.S. Open Winners and Successful Investors Manage Their Risks

GolferonGreen_UniversityoftheFraserV_Flickr-e1434142906600Back in 2006, during the U.S. Open’s final day of play, Phil Mickelson stood on the 18th tee at Winged Foot Golf Club with a one-stroke lead over Geoff Ogilvy, giving him an opportunity to capture his first victory in that prestigious tournament. After a wayward tee shot, Phil, who is known for his risky style of play, tried to carve his next shot out of the woods. His bold attempt for the green caught a tree branch, then a sand trap, and all was lost.

Those of us who watched the carnage live on TV still remember the sinking feeling in our stomachs as Phil gave away a tournament we all knew he so desperately wanted to win. During the post-tournament press conference, when asked about his risky decisions on the last hole, Phil mustered the now infamous explanation, “I am such an idiot.”

Nine years later, and still without a U.S. Open win, Phil will have another opportunity to capture that elusive title next week at Chambers Bay Golf Course in Washington state.

I had the privilege of playing Chambers Bay in a college golf tournament when it first opened. I can assure you it is a daunting course that will present incredible challenges, even for the world’s top players. If Phil is to have a chance at winning this year, he will have to learn from his past mistakes. Continue reading “How U.S. Open Winners and Successful Investors Manage Their Risks”

Three Essential Elements of a Great Financial Plan

20150323_091018“Spring is the time of plans and projects”

-          Leo Tolstoy – Anna Karenina

 

Spring is always an exciting time of year. As the world around us awakens from the winter, we all seem to experience a bump in energy and commitment to the plans and projects we outlined at the turn of the year.

For those of us living in Minnesota, the relatively mild winter and early spring has been an extremely welcome change after the winter that never seemed to end in early 2014.

However, those of you on the east coast and in the western US are coming off extremely unusual seasons. On a recent trip to Park City, a fellow skier from New York was lamenting that they traveled all the way across the US for a ski trip when would have had better snow in Vermont.

Spring break is a common time of year to execute some of our plans. Unfortunately, because we choose our destination well in advance, we can’t always control the weather when those dates arrive. What we can control, however, is how we respond when our plans do not turn out the way we envisioned.

Not feeling in control can be unsettling. But just like you have snow shovels, umbrellas and emergency kits for various weather situations, your financial plan is designed to provide some reassurance and resilience during inevitable market and life volatility. We worked with you to create a plan that helps you keep your focus on the people, the causes and the passions that bring you the most fulfillment. Continue reading “Three Essential Elements of a Great Financial Plan”

Market Peaks – The Intersection of Paralysis, (Over)Confidence and Complacency

SnowbirdOn a recent trip to Park City, Utah, we ventured over to the most intimidating ski terrain I have ever been to – Snowbird Resort. The mountain is littered with steep grades and cliffs, exposed rock, narrow cat tracks and some of the highest ski lifts I have ever been on.

If you take any of the lifts to the peak of the hill, you can see very little in any direction except the edge of the narrow ridge you are standing on and other mountains off in the distance. There is – quite literally – nowhere to go but down…and fast!

As US markets linger near all-time highs, many investors are starting to feel like they are standing at the peak of Snowbird. Continue reading “Market Peaks – The Intersection of Paralysis, (Over)Confidence and Complacency”

The Easiest Way to Reduce Financial Stress and Drop Your Handicap

golf-wallpaper-2400x1350Last year Rory McIlroy finished in the top 10 in 12 of 17 events and won 2 Major Championships establishing himself as a legend in the making. Those who have had the privilege of watching Rory play in person notice what an incredible ball striker he is and immediately fall in love with the distinct sound of his perfectly struck irons as they compress the ball into the turf at impact. Unfortunately, you’ll presumably never be able to produce that sound yourself. The good news is you don’t have to.

The most impressive statistic contributing to Rory’s successful 2014 is that he was able to navigate 1,224 of professional golf’s trickiest greens with only 23 total three putts.  To put this in perspective, that’s only one 3 putt every three rounds.

I’m not sharing any revelatory news in saying that PGA tour players are excellent putters and you need to get better if you want to lower your scores. But WHY are PGA tour players better? And what is the fastest way for you to putt more like them? Continue reading “The Easiest Way to Reduce Financial Stress and Drop Your Handicap”