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The Votes are in – “Brexit” Wins

When we warned earlier this year to brace for significant market volatility throughout this election year, a “Brexit” is not what we had in mind.

For those of you hearing this term for the first time today, you may want to get used to hearing it. We are going to hear a lot about it in the weeks and months ahead.

What is “Brexit”?

In short, Britain + Exit = Brexit. Yesterday, the United Kingdom went to the polls for a referendum vote on whether to leave the European Union. In short, the leave vote won 52% to 48%.

Why does it matter to you?

First, in the immediate term (ie. today), this is a bit of a shock to the markets. Virtually all economists and politicians were in favor of staying, and the polls leading up to the vote indicated that was the likely result. In fact, global markets had risen significantly this week in anticipation of a vote in favor of the UK staying in.

Today, you woke up to the markets dropping in a pretty severe way. However, it is important to note that this is simply the market repricing what it was incorrectly predicting earlier in the week.

Your headlines are going to read that the European markets are plummeting, tumbling, being routed, and I have even seen the term “free-falling.” Indeed, they are.

However, what none of these headlines even bother mentioning is that the MSCI Europe stock index had risen 9.75% in the last 5 days leading up to today. Today, not surprisingly, the broad European market is down just over 9%, essentially just giving back what it had gained earlier in the week. Continue reading “The Votes are in – “Brexit” Wins”

The Life Changing Power of Expert Advice

Golfing_KrzysztofUrbanowicz_Flickr-e1457466248316Like most eighth-grade boys, I thought I had it all figured out. I was proudly “self-taught” and didn’t need anyone to tell me what to do, especially when it came to my golf game.

My mother knew better, however. Behind my back, she scheduled a lesson for me with Troy Wright, a local golf instructor. Reluctantly, I went to meet the person who would ultimately change the course of my life.

Troy was passionate, patient and knowledgeable. He took videos of my swing and compared it side-by-side to PGA tour players. As they say, the camera doesn’t lie. Because he took the time to show me, I could clearly see what I was doing wrong.

Troy didn’t just start telling me what to do differently. Rather, by employing his deep reservoir of knowledge, he explained the mechanics of the golf swing in ways I could see and understand. He opened my mind, and I came to realize exactly how much I didn’t know.

The changes we made felt drastic, yet the improvements were immediately evident. In just one hour with Troy, I learned more about my golf swing than I had from the hundreds of hours I spent by myself on the driving range. 

Within one year, my average score dropped by 13 shots. As a result, I was named the MVP of my high school’s varsity golf team as a freshman. Troy’s expert advice helped me improve at a pace I never could have achieved on my own.

Seth Godin, the best-selling author, had a similar experience with his cooking hobby. He had an extensive cookbook library and spent years honing his craft. However, his wife signed him up for a cooking class with a famous chef. Godin wrote that, in 20 minutes, he learned more about cooking than he had in all the time he spent in culinary pursuits up to that point. In short, the accumulated knowledge of an extensively experienced practitioner is profoundly effective.

The do-it-yourself approach is also rewarding in its own way, but often will end up costing you far more than what you’d pay a professional. Low-stakes DIY home projects can be a fun challenge to tackle, but when the task at hand involves your life savings and financial goals, mistakes are exponentially more risky (and expensive). 

The problem is that outside of your own area of expertise, you don’t really know what you don’t know. And what you don’t know can hurt you severely. 

As a young golfer, not only did I need another set of eyes on my swing, I needed a skilled professional who knew exactly what to look for to help take my golf game to the next level. I am dubious that I would ever have earned a college golf scholarship had it not been for Troy. 

What the do-it-yourself approach cannot provide is an objective third party who asks the questions you’ve never considered. This third party, whether golf coach or financial advisor, should be someone who can help you determine your goals, provide a clear path toward those goals, and keep you accountable in your efforts to achieve them. 

Most of us are looking for direction in some capacity. We want to be confident not only that we are pointed toward our objectives, but that we are on the most efficient track with the highest odds of success. If you aren’t clear and confident about the direction of your financial life, maybe it’s time to sit down with a fiduciary advisor.

There are many people out there on the fence about hiring a financial advisor. If you are among them, perhaps it’s time to honestly revisit and evaluate your own limitations. Sometimes the hindrance is that we, like the young golfer, think we know more than we actually do. Even if you (or maybe it’s your spouse or partner) remain reluctant, go ahead and schedule that appointment. Just see what a financial advisor dedicated to the promise of true, comprehensive wealth management has to offer.

It may just change the course of your life.

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.


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”