Did You Miss the “Trump Bump?”

Okay, admit it. Whether you’re an ardent supporter or never-Trumper, weren’t you a little nervous Donald Trump’s victory would cause the markets to crash? My clients on both sides of the spectrum were anxious. I even have a friend, who’s an avid Trump supporter, call me and ask if it was too risky to get back into the market.

As we all know, markets hate uncertainty, and on election night, futures dropped like a rock. It was scary, very scary. I happened to be at a mutual fund seminar on election night, and the speaker, who’s a fund manager, didn’t sleep a wink the night before. Even professionals were afraid! But the next morning, something short of amazing happened: The market rebounded and continued to do so through the end of the year. The Dow Jones Industrial Average shot up 1,500 points. Since then, however, the excitement has dissipated, and the markets have been flat.

The question going forward is, “What will happen to the markets and the economy now that Donald Trump has been inaugurated as our 45th president?” No one really knows, keeping in mind a caveat that presidents have a limited impact on the economy. One main reason is our Constitution grants the power of fiscal responsibility to Congress, not the president. The Federal Reserve System, a quasi-government entity, may have more power over the economy than either Congress or the president. The Fed is responsible for many key aspects of the economy such as monetary policy, economic stability and supervising and regulating banks. And then there is the economy itself. The U.S. Gross Domestic Product (GDP) is around $18 trillion which covers a multitude of financial sectors and is often driven by consumer confidence; that is, people’s optimism in buying things. (Seventy percent of our economy’s activity is consumer spending). As you can see, managing the economy through government entities is disparate and complex, and a successful economy isn’t exclusively dependent on one branch of our government.

The stock market, a leading economic indicator, reflects and digests all this information and adjusts accordingly. For instance, an up market usually means good times are ahead, and a down market often precedes a recession. It is a separate entity from the political landscape, and the general trend is upwards with, of course, some down and flat periods, too. The chart below tracks the growth of a dollar invested in the S&P 500 from January 1926 through June 2016.
graph1
You can see that the general trend has been up no matter who was president at the time.

Like a baseball manager who often gets the blame or credit for his team’s wins and losses, a president gets the blame or credit for the economy and stock market. But betting your hard-earned savings on how the market will react to Trump occupying the White House is fool’s gold. Back in 2009, many people got out of the stock market because they thought President Obama was going to ruin the economy, and the stock market would never recover. What more do I need to say?

Trump and Your Investment Portfolio

If you were watching the results on election night, you saw the financial markets react. In the wee small hours of November 9, Dow futures plunged just over 4% while gold and US Treasuries soared. (Markets are funny and tend to be unpredictable in the short term). Since the election, however, the Dow Jones Industrial Average has reached an all-time high.

Sure, Donald Trump is an unconventional politician and has said that he likes to be unpredictable. At this time, we’re not sure what to think or how he’ll govern. Once his cabinet is in place, we’ll have a better idea. Still, you may be thinking that a Trump presidency is “different,” but market volatility is certainly not something that we haven’t seen before. In the past 18 months, we’ve had several instances of investors feeling that “this time it’s different.”

Back in July 2015, the Greek financial crisis dominated the headlines. Investors feared Greece’s problems would spread to the rest of Europe. Then the following month, it was “Black Monday.” When the Chinese government devalued the Yuen, markets went tumbling down. At the beginning of 2016, the Dow Jones Industrial Average got off to its worst start ever dropping 5.5%. And most recently, we had Brexit. Shortly after Britain announced it was exiting from the European Union, the market lost 6% but days later gained back 8%. The bottom line is: Markets, like people, do not like change. But through all this hubbub, U.S. markets continue to hover around historical highs.

Back to your investments. What should you do to protect yourself during a Trump presidency? Nothing. If you’re diversified, you don’t need to sweat the headlines. We can’t predict the future, and we sure as heck can’t predict the markets. That’s why it may be wise to follow the investment ways of some of the world’s wealthiest families and most sophisticated investors. They manage risk through diversification.* This means not weighting one’s investments in with any sector of the economy such as energy or banking, or falling in love with an individual stock such as Apple.

Besides, your investment portfolio isn’t designed for a four-year presidential term. You’re in it for the long run. Investors who stay the course have historically been rewarded. Here’s one thing we can anticipate during the next four years. The markets will go up, and the markets will go down. And parts of your portfolio will do better than other parts. My advice is to stay disciplined, diversified* and focused on the future. If you’re not sure whether you have enough diversification*, a fee-based financial advisor can help you.

*Diversification does not guarantee a profit or protect against a loss.

The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets.

How Will Election 2016 Affect the Stock Market?

With Election Day almost (finally!) here, the most common worry I hear from many of my clients is, “How will the presidential election affect the markets?”

Market volatility before and after the election is a legitimate concern. For sure, this hasn’t been a typical election, and a victory for either party could affect the markets. Markets tend to react to good news and bad news. In the short-term, the stock market can be emotional and illogical. That’s because people drive markets and people– especially when investing their money–can be emotional and illogical.

Dimensional Fund Advisors (DFA) recently published a new study, “Presidential Elections and the Stock Market,” and included the following exhibit of the growth of a dollar invested in the S&P 500* over nine decades (since 1926) and 15 presidencies (from Coolidge to Obama). The study examined the growth of one dollar from 1926 through the end of June 2016. The outcome shows that through Democratic and Republican administrations, the stock market consistently grew, regardless of which party was in power. At times, though, the market was down or flat, too.

graph1

The other part of the study delved into shorter periods of returns previous and subsequent to presidential elections. Again the data showed there to be little or no differences compared to market returns of non-presidential election years. The takeaway: Trying to make an investment decision based on the outcome of an election was unlikely to generate any excess return for an investor. Any positive outcome based on using such a strategy is likely to be the result of random luck. At worst, it can lead to costly mistakes. We can’t predict the economy, and we for sure can’t outguess the markets.

You may be thinking, however, that this time is different. No doubt, with a 24/7 news cycle and nonstop election coverage, it’s easy to get on the roller coaster with the Wall Street hype and media pundits. Turn off your television sets and don’t panic. If history is any guide (and in my opinion, it’s the only guide we have), the outcome of this election should have little impact on the markets in the long-term.

*The S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.

Disclosure: This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This blog contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Market Volatility: Don’t Panic. This is Only a Test.

Do you remember this public service announcement? “This is a test. This station is conducting a test of the Emergency Broadcast System. This is only a test.”

The Emergency Broadcast System was created in 1963 during the Kennedy administration and used until 1997. If you were watching a show during that time, you knew not to change the channel or adjust the dials on your TV set. (And in the early days, the three or four other channels you could get were all usually conducting the same test anyway.)

Now let’s add a few words and phrases to that PSA in terms of your investments over the past year: “This is a test. This is only a test of your will and patience.”

This past year, most of your investments were flat (at best) and some even lost money. But if you have a well-diversified portfolio, you should not change your investments — and you should certainly not attempt to guess which investments will be the best performers in the coming year. Investing is inherently unpredictable. But as a long-term investor, you must not be swayed by volatility, even when the grass looks greener elsewhere.

Market cycles

In 2015, many investors may have asked, “Am I in the wrong investments?” Well, if your portfolio is well-diversified, probably not. In fact, it’s likely that it was the markets that performed poorly, not your investments. The reasons for that vary, from economic uncertainty in China to the dramatic drop in energy prices and concerns over potentially rising interest rates.

But none of this is unusual. Markets, like many things in life, tend to cycle. They go up and they go down, and we don’t know when they will do so. The markets have had a pretty good run since 2009, so it seems to me that we were due for a flat or negative year (of course we couldn’t know exactly when that might occur).

What to do?

One of my clients recently asked, “Did anything do well?” As a matter of fact, international small companies did pretty well. (For instance, Dimensional’s International Small Cap Growth fund (DISMX) yielded around 10.5% last year.) He then asked me if he owned shares of any of those kinds of companies. I told him that his broadly diversified portfolio has a small portion of international small companies in it.

Then he wanted to know if he should move most of his money into international small companies. I responded with a resounding “No!” Besides being a riskier investment category, international small companies show absolutely no evidence that they will do well again this year.

No memory

I asked my client to imagine that he was flipping a coin and trying to guess which flip would result in heads and which flip would result in tails. Of course, after numerous tosses, we agreed that he’d have an even distribution of heads and tails. But, more importantly, we agreed that a coin is an inanimate object with no memory. Just because five flips have landed on heads doesn’t mean that the next flip will land on tails.

I explained that stocks are the same way. They have no memory. There is no guarantee that international small companies will continue to do well next year. Sticking to the discipline of having a broadly diversified portfolio helps us avoid falling prey to the false notion that last year’s best performers will be the winning performers the next year.

Keep it boring

A well-diversified portfolio doesn’t speculate or gamble on what is going to happen next. “Investing should be boring,” I told him. “If you want excitement, try hang gliding. If you want to gamble with your money, go to Vegas.”

So in 2016, resolve to stick with your well-diversified portfolio. If you’re not sure whether you’re diversified enough, have a trusted advisor take a look. But remember, this past year was simply a test of your patience and your will to stay appropriately invested, even when the going gets rough.

(This article was originally published on NerdWallet.com:  http://www.nerdwallet.com/blog/advisorvoices/volatility-psa-dont-panic-this-is-only-a-test/)

What a Fed Rate Increase Could Mean for You

Since the Great Recession started eight years ago, the Federal Reserve has kept its benchmark interest rate near zero as a way to strengthen the economy. However, according to the minutes from an October 2015 gathering of Fed officials, a rate increase is likely in December. A decision should be announced Dec. 16.

Any economic change brings good news and bad news. Here are a few parts of your financial life that might be affected by a rate increase:

Home sales

Rising interest rates generally put downward pressure on the demand for homes and home prices, at least in the short term. So if the Fed raises rates, you may not see very many “For Sale” signs in front yards for a while.

This might make you nervous if you’re planning to sell your home soon. After all, most people’s wealth is in their homes. But a small rate increase doesn’t necessarily mean that the housing market will plummet. If rates stay near their historic lows, many prospective buyers will realize that they still can afford a new home and will buy one, anyway.

Bonds

Interest rates and bond prices move in opposite directions. When interest rates go up, bond prices go down. If you’re thinking about selling your bonds before they mature, higher interest rates will work against you. However, if you’re holding those bonds until maturity, you can sleep well. You’ll still collect interest, though at a lower rate than you would on newer-issue bonds.

If you own shares of a bond mutual fund, a rate increase will more than likely cause those shares to temporarily drop in value. But fund managers will begin to buy higher yielding bonds, which might help soften the blow. For the future, consider this strategy used by proactive bond fund investors: Stay out of long-term bond funds, which take the biggest beating when rates rise.

Stocks

The effect of rising interest rates on stock prices is a little murkier than its effect on bonds. Stock prices generally decrease when interest rates go up, but that’s not always the case. If we’re in an economic expansion when rates rise, more often than not, stocks go up. Conversely if the Fed is raising rates to “cool down” an overheated economy, stocks tend to go down before rebounding. If you own CDs, their rates will increase immediately if the Fed raises the benchmark.

Hiring and income

By keeping rates low, the Fed hoped to encourage economic growth, which is often measured by employment numbers. If the Fed does raise rates, it would be a signal that employment is recovering, and firms are hiring.

More hiring means more income for everybody. And higher incomes tend to solve other problems, including low demand for housing. Even though a rate hike would mean that it costs more to borrow money, higher incomes help offset these costs.

Higher incomes also mean more spending. More spending means that workers keep their jobs. And the cheap prices that we’re seeing at the gas pump put even more money into consumers’ pockets that they’ll want to spend.

In the Fed’s words, it might be time for a rate increase because there’s been a “tightening of the labor market.” In plain English, that means more hiring and less firing. Ultimately, the Fed’s decision reflects growth — which means that, for you, the good news of a rate increase should hopefully outweigh the bad news.

Stay Diversified and Don’t Get Hurt

Recently, several clients have asked me why their account has not “made any money” this year. My answer is always the same:  “There hasn’t been the kind of money to make like we’ve made the past couple of years.” That is, unless you had the foresight twelve months ago to put all your money into an International Small Company mutual fund which has yielded about 8% year-to-date returns. Except for nominal returns in bonds, most of the other market segments have produced flat to negative returns in 2015.

Does this mean your investments are bad investments? Of course not.  It just means that it’s been a tough year for markets in general. China’s stock market plunged back in June, and in the past couple weeks, it seemed as if the markets were anticipating the Federal Reserve Bank raising its benchmark interest rate.  Energy stocks, in particular, have taken a very big hit (but cheap energy prices have been good for our pocket books). None of what I’m describing is unusual. Markets, like everything, tend to cycle.  After all, the markets have been on a pretty good run since 2009, so we were due for a flat or negative year.

We can’t predict the economy, and we for sure can’t outguess the markets.  So, how do you minimize your risk in a flat or negative year?  The best thing to do is to hold as many diversified asset classes (international, domestic, real estate, small and large companies, etc.) as possible.  And that’s precisely how your portfolio is designed–to protect you in times of uncertainty or volatility.

The discipline of having a broadly diversified portfolio helps us avoid the faulty idea that there is a trend of higher returns in last year’s best performers.  Look, stocks aren’t human.  They are inanimate and do not have a memory!  If we try to predict trends or invest all of our money into one company, chances are we’re going to get hurt.

So let’s stay disciplined and stick by your well-diversified portfolio.  Let’s focus on the long-term and not speculate or gamble with your money.  Or, worse, make decisions based on today’s headlines or Wall Street hype. Of course, if you want to discuss “tweaking” or rebalancing your portfolio, we can sit down together in the New Year.  You can reach me at:  216-292-8700 or email me at:  jeff@silawealthadvisory.com.

Real Estate vs. Stocks: What Trump Can Teach Us about Investing

Is real estate or the stock market a better investment? Of course, this is an apples-to-oranges comparison, but the argument never ceases.

Many pure real estate investors will rarely, if ever, touch a stock or even a bond because they prefer tangible investments and the steady income that real estate can produce. Investors like myself who favor the stock market — and never want to be awakened in the middle of the night over a leaky roof — stay away from owning rental property. Both sides argue that theirs is the better way to invest.

Let’s look at one of the best-known businessmen of our time, Donald Trump, to see how his wealth grew with real estate. As columnist Joe Nocera wrote in The New York Times last week, Trump’s record is mixed. The son of a wealthy real estate developer, Trump was often bailed out by his family, and there were several times when Trump properties declared or came close to declaring bankruptcy. These setbacks demonstrate how challenging real estate investing can be, even for those very experienced in the field.

It’s also risky. As Trump grew older (and wiser), he became more risk averse. Instead of building new properties, he managed them, licensed his name and became a reality TV star.

Today Trump claims to be worth $8 billion, a lot of money. But what if he had put his money in the stock market rather than real estate. Nocera looked back at Trump’s net worth in 1988 and calculated that if Trump had invested that money in the S&P 500, he would be worth $13 billion now. So, he suggests that Trump’s real estate investmentscost him $5 billion.

But who are we kidding? If you had $8 billion, would you really care about having $5 billion more? I certainly wouldn’t. And you don’t become “The Donald” by investing in the boring old stock market.

So whether real estate or the stock market is a better investment is still not easy to answer. Perhaps the biggest distinction between these two investments is that stocks are more volatile, which is a key reason for their superior returns. On the other hand, real estate is costly to maintain, as one of my client’s found out recently when the rental property she inherited needed nearly $10,000 in repairs.

Some of my smartest clients own real estate, stocks and bonds. They know that each investment will rise and fall, but they are confident that they will do well in the long term. And for a person like me, who doesn’t want to own physical properties, there are ways to invest in real estate through the stock market, an attractive alternative. You can own shares of office parks, retail shopping centers and health care facilities — and never lift a hammer.

This article was originally published on NerdWallet.com http://www.nerdwallet.com/blog/finance/advisorvoices/real-estate-stocks-trump-teach-investing/

The Stock Market Behaves Like a Fellini Heroine

I’ve always likened the stock market to a woman.  A certain kind of a woman, that is. Remember the Fellini films of the nineteen seventies? There was usually a gorgeous Italian woman who was adored and pursued by all the men around her. As desirable as this woman was, however, she was always loyal and passionate to her lover. Maybe a little too passionate, though.

In a scene where this woman is dining out with her husband, he has a roving eye and flirts with the waitress throughout the evening. Our heroine finally gets fed up, throws a drink in his face and kicks him in the shins with her stilettos. Her husband begs for forgiveness, orders her favorite desert and feeds it to her in a romantic way.  Everything’s fine until they stroll down the street, and he waves and shouts “hello” to an even more beautiful woman.  Well, that’s it.  His wife starts screaming at him calling him a no-good cheater and liar and hits him in the head with her purse.  He puts his hand up and tries to tell her something, but it’s too late. She spats in his face and kicks him in the shins again. While he’s hopping on one foot trying to tell her something, she turns and runs away from him.

He catches up to her and pleads with her to listen to him as she starts walking away. He grabs her and explains that the woman was his cousin, Sophia, who was visiting from Florence. Our heroine is released and, embarrassed about her behavior, starts to cry.  Her husband embraces her, and she starts to kiss him passionately, telling him how much she loves him.  (Of course, Sophia is not really his cousin).

Now back to the stock market.  We know that it can be emotional and illogical in the short term. Think about how the market reacted last Monday.  With China devaluing its currency, the Fed’s pending policy on interest rates and energy’s volatility, we saw a big drop in the markets.  Markets, like our Fellini gal, don’t like uncertainty and tend to overreact making everyone’s life miserable. The emotion, however, does not look at the positive indicators such as robust corporate profits, unemployment at its lowest in seven years, and soaring US home sales. Rather, markets focus on the weaker aspects of the economy, most of which has not even happened, but they fear it will happen. Mama Mia!

So like our beautiful Fellini woman, the market is volatile and emotional. In the short term, that is. Over the long term, it is rationale and rises with the ever expanding economy. The economy is abundant and not a zero sum game.  For instance, after World War II, the S&P 500 was priced at 14.  Yesterday, on September 2, it was priced at 1,949. That’s a 7.3% annualized return (and does not include the dividends which add another 2.5 percent or so to the return)! For that kind of return on my money, I’ll take a few kicks in my shins.

Why You Shouldn’t Panic During a Down Market

The past few days have been turbulent on Wall Street, and it’s been years since we’ve seen this kind of fear among investors. But don’t panic. The best way that I know to combat the fear of a down market is to look back in history and realize that the stock market is an upward reaching entity which occasionally takes a break and hovers at lower elevations for awhile.

Let’s look at the stock market’s history which is the only guide we have. The graph below illustrates every up and down market from 1949 through the end of 2014. Viewing this graph, it becomes evident that up markets far exceed down markets when measured by the percentage of rise and the number of years the markets rise.

For instance, there was a total of 780 months during that 65-year period and 606 of those months were up months for the market; conversely, there were 174 down months. The bottom line is that during this 65-year time period, the S&P 500 index returned 11.5%.

If you’re still anxious, my advice is always the same: stay disciplined, goal-oriented, and diversified. That’s the best way to navigate these market storms.

Up Markets Greatly Exceed the Down Markets/Change in the S&P500 (1949-2014)

the-most-important-chart-on-investing-youll-ever-see

An index is a portfolio of specific securities (common examples are the S&P, DJlA, NASDAQ). The performance of which is often used as a bench mark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios, and investors cannot invest directly in an index. Past performance does not guarantee future results. Advisory services offered through Jeffrey A. Bogart, Registered Investment Advisor

“Man Smart (Woman Smarter)”*

Besides the obvious, there may be no greater distinction between men and women than when it comes to investing. Recent studies show:

• 70% of women say they are more comfortable saving than investing;
• Conversely, 70% of men surveyed were willing to take risks for higher returns;
• Over 40% of the men surveyed said they enjoyed the “sport” of investing (I have yet to hear that nonsense expressed by a woman);
• Both professional and amateur female investors take less risk and have more diversified portfolios compared to their male counterparts. This may translate to better investment returns!

Even women who have a basic understanding about investing do not feel they can parlay that information into better investment returns. (Women’s intuition wins again because it’s impossible for anyone to outguess the markets). Of course, men feel the opposite.

Well, gentlemen, I’ve got some bad news for you. It turns out that women, both professional and amateur investors, get better returns than their male counterparts. Why women do better, however, isn’t rocket science. First, women take less risk than men and, unlike men, are more apt to ask for advice. Women, as we all know, are more apt to ask for driving directions, too. (Do you see a pattern here, guys)? Also, women aren’t overconfident (like men) which means they are less likely to be deluded into thinking they know more than they really do. Ultimately, women realize they are not in control. This means that women are more likely than men to attribute success to factors outside themselves, like luck or fate.

Understanding that we have very little control over the markets allows women the rationale they need to avoid panic. What’s more, it allows them to admit when they have made a mistake. When it comes to investing, we can all benefit from both male and female attributes.

Men, your household’s investment portfolio will be less risky and more diversified if your wife helps manage it. Down the road, she’ll share what comes out of that portfolio. Shouldn’t she share what goes into it? Chances are, her ideas and emotions will complement yours, and you’ll both end up wealthier. And at least one of you will end up wiser.

If you have a problem with this, guys, just remember the title of the old Harry Belafonte song “Man Smart (Woman Smarter).”

*Together, we know more than we do alone. Watch this three minute video about “The Power of the Markets.” Just click the link and scroll down to the video.

http://silawealthadvisory.com/golden-gate-portfolio.html