How to deal with market volatility
The start to 2016 has been marked by uncertainty in a number of areas. China, ISIS, Oil, etc. Not surprisingly, this uncertainty has caused plenty of fear and, consequently, volatility in global stock markets. Also not surprising are the familiar echoes from the “talking heads” on television and even some investors to “Get out!” or do something. Of course, there is no one-size-fits-all approach to investing or risk management.
The start to 2016 has been marked by uncertainty in a number of areas. China, ISIS, Oil, etc. Not surprisingly, this uncertainty has caused plenty of fear and, consequently, volatility in global stock markets. Also not surprising are the familiar echoes from the “talking heads” on television and even some investors to “Get out!” or do something. Of course, there is no one-size-fits-all approach to investing or risk management. Every family’s situation is unique and calls for an equally unique approach. Indeed, with the typically short-term nature of these downturns, some investors likely ought to be buying, not selling.
So what does a person do when markets are volatile? Well one of the worst things a person could do is react emotionally and make a rash decision. Pause and ask yourself two questions: 1.) What is your investing time frame? 2.) How is your portfolio invested? If you’re 10 or more years from retirement and your portfolios are invested aggressively, that’s probably ok. Short-term volatility should not change a long-term investment strategy.
What if you’re closer to retirement or already retired? If you’re within 10 years of retiring, you probably should be lowering the risk in your portfolio already. Meaning moving some of your aggressive investments (often stock), toward less aggressive investments (often bonds). If that’s you, depending on your tolerance for risk, that probably means you have 50% - 75% of your total investments in stock. Because most people still need their investments to grow in retirement, that same logic applies; although the total percentage of stock may be in the slightly lower 40% -65% range. At Macco Financial Group, this is one of our guiding principles. And we work very hard to position our clients' portfolios for volatility so as not to expose them to excessive risk.
Finally, we recently hosted a conference call with Nicholas Lacy, Raymond James Asset Management Services’ (AMS) Chief Portfolio Strategist. Nick is greatly respected in the industry and shared some tremendous insight on AMS’ views of global markets, volatility, growth expectations and what they have done and are doing to position portfolios for the future. If you’d like to hear a replay of that call, it is embedded below. We will be proactively contacting clients. And we invite you or anyone else concerned about the markets to call our office at 888-617-6830.
Respectfully,
Michael J. Macco
President, Macco Financial Group
Investment Management Consultant
"Any opinions are those of Michael Macco and not necessarily those of RJFS or Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance may not be indicative of future results."
New Year's Resolution
If I were to make a generalization about the people who have bright financial futures ahead of them: they are prodigious savers and investors. For the most part, they have set up their wealth accumulation plan to be automatic, via either large 401(k) contributions, large contributions into other investment accounts, or, in many cases, both.
It’s nearing the end of January. Earlier this month, we put out a video about a financial New Year’s resolution. This topic is important enough that we felt it should be our first blog post ever.
So, if you want to skip the rest – here it is: In our opinion, you should increase the amount you are automatically investing right now. Don’t think about it. Don’t resolve to do it at a future time. Just do it now.
This thought comes from a simple place. Some of the people we see may be headed towards disappointment and all seem to have one thing in common. They have not set enough aside for their future.
On the other hand, if I were to make a generalization about the people who have bright financial futures ahead of them: they are prodigious savers and investors. For the most part, they have set up their wealth accumulation plan to be automatic, via either large 401(k) contributions, large contributions into other investment accounts, or, in many cases, both.
The fact that the accumulation is automatic is important. If you have to remember to write a check every now and then, it probably won’t happen. Compare that to the one-time effort to increase your 401(k) contributions by 1% or 2%, or the time it takes to set up or increase the automatic draft into an investment account. It’s one and done, and then it actually happens.
Beyond actually happening, let’s talk about a couple of finer points. First of all, if you have an Employee Retirement account such as a 401(k), and there is an employer match, be sure to contribute enough to earn all potential matching dollars. That is free money. Don’t let it slip away.
Next, what I have observed is that most people can almost always invest more than they are right now. I challenge you to increase your automatic investment right now. Even if the change is only $50 or $100 per month, commit to starting now, and continue for six months at least. It has to be automatic. If you are like most people, you will find out that you barely notice that the money is not in your checking account. Then, in six months, if it has not hurt, do it again. And again.
Using this method, I have observed people more than double their monthly investments. And that alone can make a significant impact on their long-term accumulation.
Patrick Stoa
For questions, comments, and conversation, call us at 920-617-6830.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Patrick Stoa and not necessarily those of Raymond James.
What is Investing?
Here is an interesting question: What does it actually mean to invest? When we were thinking of topics to bring to you, we kept coming back to foundational questions, to help you understand what we are really doing.
Here is an interesting question: What does it actually mean to invest? When we were thinking of topics to bring to you, we kept coming back to foundational questions, to help you understand what we are really doing. At the most fundamental level, investing is spending time, effort, or money in the hopes that whatever is acquired or built will return a better value to you in the future.
In one sense, we invest every day. For a simple example, we may spend time building a deck on our house, because we value the time we will spend there with family more than we valued the time, effort, and materials it took to build it.
Before we continue, perhaps it makes sense to question why we should invest at all. Why not just spend all our money as we earn it? Well, if we could work all our lives, and earn what we need up until the day we die, there would be no need for financial planning at all. That used to be a reality. The average life expectancy of someone born in the 1920’s was 53 years. Fortunately, general health and medical advancements provide most of us with a much longer life well beyond our working and earning years.
For a time, pensions were somewhat common, to provide income after our productive years. Now, however, pensions are quite rare.
So, back to the question – Why invest at all? People have to invest because they are likely to outlive their ability to produce income, and most people would like an income and lifestyle above the income provided by Social Security.
There are many types of investments available. Two very common types are:
1. Stocks – owning a portion of a company and participating in the potential profitability of that company. The company may pay out cash on hand to owners in the form of dividends. At some point in time, the investor may sell their ownership interest. If they can sell it for more than they paid, a profit will occur there as well.
2. Bonds – loaning your money to a company. The company then has regularly scheduled interest payments, and eventually a payment to return the principal of the loan.
One subject that comes up relative to investing from time to time is the sense of “gambling.” There are a few common sources to this feeling. Market volatility is well reported in the media, can create unease, and is completely outside of your control. There are a few things within your control, however. Proper diversification and asset allocation can change both the level of risk and types of risk in your portfolio. It really takes a team approach between the client, the advisor, and professional money managers to consider these things to be systematically and purposely invested.
Patrick Stoa
For questions, comments, and conversation, call us at 920-617-6830
Any opinions are those of Mike Macco and Patrick Stoa and not necessarily those of Raymond James. Diversification does not ensure a profit or guarantee against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Dividends are not guaranteed and must be authorized by the company’s board of directors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.
"Getting Naked"
As financial advisors, relationships are extremely important to us. Clients are central to us, and in my opinion, the very intimate and personal conversations we are privileged to be a part of are truly my favorite part of the whole business.
Recently, a friend lent a book to me from his rather large collection. It was “Getting Naked” by Patrick Lencioni. Quite simply, the plot was light and enjoyable, while the lessons were demonstrated exceptionally well.
“Naked service is about being completely vulnerable with clients—open, selfless, humble, transparent, and kind. It means that you always act in the client’s best interests, and don’t over-think what you say and how you say it.”
-Patrick Lencioni
The story starts with a very large consulting firm acquiring, and trying to integrate, a small consulting firm. The manager from the larger firm is assigned to lead the integration, and he is regularly bewildered by the way the small firm works. Time and time again, the smaller firm demonstrates a very transparent communication style, while his large firm is very reserved, almost aloof. The larger firm seems to want to demonstrate their intellectual superiority to their clients rather than understand them. Not surprisingly, the two communication styles are incompatible, and some conflict emerges in the attempted integration.
The key thoughts are generously summarized at the end of the book. These points could be valuable to almost any relationship, and even had me thinking about some of my interactions with certain family and friends.
How does all this relate to finances and investing? As financial advisors, relationships are extremely important to us. Clients are central to us, and in my opinion, the very intimate and personal conversations we are privileged to be a part of are truly my favorite part of the whole business.
If you want to have a conversation or a coffee, call me at 920-617-6830.
Patrick Stoa
Raymond James is not affiliated with nor endorses the book, “Getting Naked,” or its author, Patrick Lencioni. Opinions expressed in the video are those of the speakers and are not necessarily those of Raymond James.
How long could you live without the stock market?
Would you worry if the stock market closed for five months? It did just that at the outbreak of World War I. I’ll admit, that is over 100 years ago. But what if the market was only open a few days a month? I would guess that after a time, most people would actually worry less than they do now. To see why that is so, let’s talk about what a market is, and what it does for us.
Would you worry if the stock market closed for five months? It did just that at the outbreak of World War I. I’ll admit, that is over 100 years ago. But what if the market was only open a few days a month? I would guess that after a time, most people would actually worry less than they do now. To see why that is so, let’s talk about what a market is, and what it does for us.
So, we hear about the stock market all the time. Our media outlets seem to yell to us about the Dow Jones Industrial Average and the S&P 500 indexes on a daily basis. However, those are indexes, not a market.
The true definition of a market is a place where buyers and sellers meet to agree on the price and delivery terms for a transaction – the best known being the New York Stock Exchange, which traces its roots to 1792. The NYSE trades in stocks, but there are other markets for stocks, bonds, options, commodities, and many other financial instruments throughout the world.
Let’s also think about what a market is not. It is not a determinant of value. A market only reveals what buyers are willing to pay, and what sellers are willing to accept at one point in time. The actual value of the items being negotiated can be far in excess or far less than the price that is agreed upon.
So why is the definition of a market relevant? It’s all in how we choose to think about the whole concept of a market. The various stock markets, for example, do us an incredible convenience. They provide the opportunity nearly every day to sell shares we own, or buy new shares. The transaction is typically quick, easy, and really quite cheap. Basically, stock markets offer what we call “liquidity,” which is the ability to quickly convert your asset to cash.
In exchange for the convenience of liquidity, we are subjected to the daily drumbeat of good and bad market news, along with favorable and unfavorable valuations on everything we own each and every day. Stock prices in particular can be very close to the actual value or very far from actual value of a company at any point in time. Over longer horizons, they will tend to follow the growth in the value of a company, but in any shorter period they can drift quite a lot.
In contrast to the stock market, real estate transactions are generally not quick, easy, definitely not cheap and, by the nature of real estate, they are local. In other words, liquidity is low in most real estate markets. If the real estate market was more like the stock market, someone would knock on your door each morning offering you a new price for your house. It might be higher than you expect, or lower. If someone offered you a price you knew was too low, would you sell because of the new price? Would you even worry about it? Unless something has changed in the neighborhood, you probably would not give it a second thought. You are likely to wait for a more reasonable offer from another buyer.
The key takeaway is to think of financial markets and investments much more like real estate. Despite the media shouting S&P, NASDAQ, and DJIA indexes at you, the market price of your assets today is only an opportunity to sell or buy, and certainly not indicative of true value. Remember, the financial markets only provide a price and liquidity, which is convenient. But if you have no need for your invested money for several years, you certainly do not need to pay attention to the daily financial news.
So back to the original question – would it worry you if the stock market was closed for an extended time? It should only concern you if you needed the cash during that time. Otherwise, you still own your assets, and the business you own is still operating. Your worrying energy would be better spent elsewhere.
If you want to have a coffee and debate about how long you should go between looking at the value of your holdings, give me a call at 920-617-6830.
Patrick Stoa
This information does not purport to be a complete description of the securities, markets, or developments referred to in this material, it has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Please note that direct investment in an index is not possible.