Posts filed under 'Economic Perspectives'
2010 Is a Very Good Year
We are looking forward to the Christmas Season this year with great feelings of Thanksgiving. 2010 has been exceptional for Resource Advisory Services. Clients who began the year with us have a larger net worth. The year’s good investment performance has been significant. Yet, very important factors were contributions to assets and debt reductions. As we monitor these for clients, we are thankful for those who have confidence in our advice in many decisions.
We are also very appreciative of new client relationships in 2010. The number is impressive relative to the entire history of Resource Advisory Services. Yet, the number is overshadowed by the personal relationship qualities we perceive in the people we met. There is more to money than money®. The people and the very interesting issues they brought for us to consider are much more invigorating than investments management. As an example of how we feel on this, a couple of projects brought clarity for clients’ financial concerns, without a need for our ongoing management. Even those give us reasons to be thankful. We met interesting people who told us we improved their lives.
Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 50645 & 50824
December 10th, 2010
by J. David Lewis
With all that has happened since the market peak in the fall of 2007, the recent three months are pretty mundane. July 31, 2010 was the end of a strong month, which now seems to have ended two volatile months (May and June). The S&P 500 Index return from July 31 to October 31 was 7.97%, which is a good quarter. This recovery, like most, produced at least one period of volatility, along with widespread fears of a “double-dip recession.” Depending on the person interpreting the history of “double-dips,” they never, or almost never, materialize.
The response to “this time is different” should be; “Yes, this time it is different, except for all the ways it is the same as every other bear market and recovery. And, ‘this time is different’ is a way they are all the same.” The “double-dip recession fear” is another way bear markets are almost always the same. This time, we heard that the pre-election uncertainty would cause a double-dip. If it does, it will have to be after the election instead of before.
There is more to money than money.® The bulls and bears will create another bear market someday. No one can know when. Someone should have a list of these “adages” available to review the next time we are going through one of these, as a tool to help us stay grounded.
For now, there just doesn’t seem there is more to say about our Economic Prospective. The economy is improving slowly, which is what we have heard for at least 18 months. I will follow the advice of an old cowboy saying – “When there’s nothing more to say, don’t be saying it” (Cowboy Ethics by James P. Owen and David R. Stoecklein).
Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.
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November 4th, 2010
Economic Perspective – Sell in May and Go Away
By J. David Lewis
It seems I have heard an expression, “Sell in May and Go Away,” every spring for most of my adult life. I assume it comes from a belief markets will be turbulent through most summers. For 2010, there certainly has been a good deal of market volatility. The problem with the expression is that selling in May of 2010 would have been too late. The S&P peaked in late April. The markets were far below their peak only a few days into May. The correction was so sharp it would have been almost impossible to avoid selling close to the lowest levels of the summer.
Selling in May of 2009 would have been even worse. The S&P return for April 30 to July 31 was 13.81%. May 31 to August 31 was 11.67% and June 30 to September 30 was 15.61%. Missing any of the 2009 three-month periods after February would have substantially retarded portfolio growth – even with the volatility from April 30 to August 31, 2010. A few days ago, a news story proclaimed that September 2010 might be the best September in 71 years.
Yes, the summer of 2010 has been uncomfortable. Around June 30, we had to coach a few friends through uneasiness. It is very true that the hardest work in our profession comes during periods when markets are battered and fees for our services are generally reduced. During depressed markets, we experience the financial decline in “real time,” rather than in portfolios that will be used for lifestyle spending in the future – often very far into the future. Fortunately, this summer we have seen increased new client demand for our services.
In late September, Christie and I adventured out for our first extended vacation since our January 2008 trip to Sedona, Arizona. That trip inspired Markets with Bulls & Bears, which is a story that still gets an impressive number of visitors to our website. In the summer of 2009, despite the market recovery at the time, we were like a lot of other people. We simply did not feel like spending money. The vacation places we visited in North Carolina and Georgia felt depressing. We moved from one town to Highlands, North Carolina in search of a more comfortable and upscale experience. Without a hotel reservation, Christie walked to the desk and asked if there were any special deals. The room was nearly half our previous stay there. Yet, Highlands was just not as enjoyable as our previous trip there. Shops were closed and the vacationers that made it there didn’t look happy.
In 2010, the Black Hills of South Dakota felt dramatically better. People seemed to be smiling a lot more and there was a sense that the summer vacation season was reasonably good. Hotel rooms appeared to cost about as much as one should expect and the facilities appeared close to full. The restaurants were busy. It felt like a vacation among people enjoying themselves. Although we didn’t spring for another piece of art, as we did in Sedona, it felt much more like a real vacation than we could feel in 2009.
Despite this summer’s volatility and concerns for a “double-dip recession,” brave souls were venturing back into a little spending. When the debt and saving aspects of personal financial statements have been repaired sufficiently, this is what our economy needs. I think the “double-dip” will be avoided yet again.
Once in the summer, I heard that there has been only one documented “double-dip” in history. Another time I heard there have been only two. Bryan Hankla CFP® attended an advanced investments workshop in San Francisco a few weeks ago, where an older and experienced portfolio manager said he is not yet convinced there has ever been a double-dip recession. Bryan was impressed with his careful dissection of historical periods some might call “double-dips.” Who knows? Double-dips may be mythical. Continuing education is very important for putting the latest news story into perspective. Bryan gets to share the experience of strong professionals regularly through the requirements of National Association of Personal Financial Advisors.
So, now we are looking forward to October, which is the month that had both the Crash of 1987 and Black Monday of The Great Depression. Some say the upcoming month has potential for enormous surprises. It certainly does. Every month does. At a Wyoming visitors’ center on the last day of our vacation, an email on my cell phone told of large “wholesale credit unions” being rescued or closed. I briefly wondered if the dramatic news might hurt hopes of a good third quarter. Any concern I had was soon dissipated. As I write this, it looks like the S&P 500 Index return will be somewhere around 11% for the quarter.
We do not know what October, November or December will bring. There will always be a struggle between Bulls and Bears. At Resource Advisory Services, our education and experience tell us it is very important to help our clients, and anyone we can, understand that staying with a good portfolio allocation is the best anyone can do. The most dangerous times are when we believe we are absolutely sure about the short-term future course of any free markets. At those times, we have a high probability of being wrong. All the euphoric and depressed times will eventually blend into a long-term that includes many short-term dramas. There is more to money than money®. It is never as simple as one might be tempted to believe from an expression like “Sell in May and Go Away.” This one may have been concocted by people who wanted a full summer of vacation.
Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986 and is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 49607
October 1st, 2010
by J. David Lewis
After a very robust start to the stock market recovery, a correction occurred in May of this year. So far, the decline seems pretty much confined to May. For the three months since May 31, volatility has been significant. Technically, the three-month S&P 500 Index return was -3.17% to August 31. However, the first day of September gained +2.95% for the Index. With a slightly different three months, the S&P return could have been virtually unchanged or positive. The number of short-term swings this summer has sometimes been nerve wracking. For two consecutive months, my grandchildren’s purchases were on a dramatically up day, when I want them on down days. This is enough to wear on the patience of almost anyone.
Generally, most economists we follow continue to say a slow recovery is underway. In the last days of July, Bryan and I heard an Atlanta Federal Reserve economist discuss his analysis in considerable detail. People continue to save and reduce debt, instead of buying products that create jobs. Businesses are very careful about hiring, because they are uncertain products and services will be bought. It is ironic that improving personal finances for so many consumers is creating a challenge for the economy in general.
An interesting “antidotal side story” on this is the number of new clients who seem to have been moved to ask for our help. If this trend is prevalent among our colleagues, we consider it more evidence people are getting their personal financial affairs in better order. Our work on comprehensive financial affairs; instead of focus on just investments or just other financial products; seems to be in more demand these days.
Also, during this summer new Financial Regulatory Reform finally became law. From our perspective, it will probably improve things, at least some. Making financial institutions stronger got much of the media attention, with less emphasis on measures to protect consumers. The latter of these has been important to us since the beginning of Resource Advisory Services and its professional organization National Association of Personal Financial Advisors (NAPFA).
We believe strongly that everyone who works in a position that might give individual financial advice should be held to a Fiduciary Standard. Too many sales people, who are not required to act in the best interest of their customers, can very easily appear as though they are advisors. Fee-Only service and Fiduciary standards should be improved.
Our colleagues made a very strong effort to incorporate these requirements into the Financial Regulatory Reform. At Resource Advisory Services, we called attention to the debate through our WUOT FM 91.9 sponsorship announcements and our blog. In the end, the bill did not include language for a Fiduciary standard. Instead, it gave the Securities and Exchange Commission authority to issue rules for a required Fiduciary standard, after a mandatory six-month study.
We are hopeful their decision will improve transparency for every relationship between financial advisors and clients. There will be many who lobby to avoid these responsibilities. I personally remember being a banker who complained vigorously about Truth in Lending Legislation implemented in the 1970s. Now, as a fiduciary, representing our clients’ best interests, I am thankful for clear, concise terms in borrowing transactions. If the SEC can be convinced to establish regulations with similar benefit for any buyer of mutual funds, annuities, or life insurance policies, our world will be better.
Yes, Resource Advisory Services’ number of competitors will likely increase. That is alright. We have been a fiduciary for twenty-five years. The fiduciary culture is ingrained in virtually everything we do. That means we are most interested in the best interest of our clients, including our understanding their ability to choose advisors who may serve them better than we can. There is more to money than money.® We want everyone who looks like a financial advisor to serve with their clientele’s best interest at heart.
September 2nd, 2010
Economic Perspective – July 1, 2010
Market Volatility & Bonds
by J. David Lewis
When we published “Is the Recovery for Real?” – More than Money Resource, June 1, 2010, there was not room to develop another concept, which still deserves attention. In the words of Dirk Hofschire, CFA®, writing for Fidelity Management & Research Company’s Market Analysis, Research & Education (“Stock Market Corrections: Unsettling But Not Unusual,” May 2010). “With U.S. stocks falling more than 10% from their April peak, the market has officially entered correction territory for the first time since the cyclical bull market began in March 2009.”
We have heard and felt tension with people who focus on day-to-day markets. Some pay more attention to the “up days,” while others focus on the “down days.” After the trauma of the last 18 to 24 months, the discomfort is understandable. There is considerable evidence people are looking for safety. On Tuesday, June 29, my Wall Street Journal email titled ”The Evening Wrap” reads; “The concerns sent investors fleeing to safety assets, sending the dollar, gold and Treasurys higher. The rise in Treasurys pushed the yield on the 10-year note below 3%, to its lowest level in more than a year. Bond yields move inversely to prices.” Now, I want to explore whether bonds will help. I hope to also discuss my thoughts on the role of annuities soon.
Bonds seem much safer than stocks for most people. The economic trauma is still fresh enough for today’s extremely low interest rates to seem acceptable for perceived safety. Yet, we are seeing quite a few articles warning investor of bonds’ interest rate risks.
The bold front page of American Association of Individual Investors Journal (June, 2010) reads “Bonds and Interest Rate Risk.” The article begins with “Recent cash flows into bond mutual funds and exchange-traded funds have been very strong.” The article has considerable detail on how rising interest rates decimate bond prices, especially for bonds with long term maturities.
Morningstar Advisor, a sophisticated publication for independent advisors, has a June cover that reads “Bond Fire – Ignoring the dangers, investors rush to fixed-income funds.” An article titled “The Game Is Up,” discusses the dilemmas facing bond mutual fund managers as more money flows in. With interest rates low, they cannot provide the income investors want. When interest rates eventually increase bond values will fall, along with the value of the mutual fund shares. There is a very high probability fund managers face a “no-win game,” trying to navigate portfolios through these perils. Bond funds typically do not close to new inverstor when the managers believe the markets are poor for their particular expertise.
These and other commentaries seemed to set the stage for an NPR comment near mid-June. I didn’t catch the program, interviewer or interviewees’ names. The program was similar to much of the background information in my life, until a line to the effect “the definition of a bubble is whatever has exceptional flows of cash until it burst.” After that, I again heard a version of the story about exceptionally high investment flows to bonds and the interest rate risks these investors are taking.
One of my all time favorite investment stories began in May 1978. I was probably one of the youngest attendees at The American Bankers Association – National School of Bank Investments. These bankers were passionate about bonds for the seven-day school. The last event was a panel discussion that resembled a debate over whether interest rates would peak in October or December. Most of us there did not believe the U.S. economy could sustain interest rates higher than they were already. If these panelists were right, our stress would soon finally end. They professed that interest rates were destined to stabilize or fall in a few months, which would mean relief from our fears of continued rising interest rates and falling bond prices.
I recently added the red vertical line to this graph, borrowed from Chris Davis’ “Is the Recovery for Real?” presentation. It marks the approximate date of my 1978 story. The gold line represents the continued unexpected climbing interest rates. The orange line represents bond prices that continued to fall for at least three years.
The very important lesson I learned was that these “experts” completely missed it very badly. Today, cash flows into bond mutual funds tell us that many people are buying into much more bond risk than they imagine. The most likely reasons are the trauma of 2008 and the recent volatility. They are motivated by a belief that they are being safer than they would be with stocks. The title of the graph is “The Last Time Yields Were This Low, Bond Prices Plummeted for Over Two Decades.”
Now, let’s put the recent volatility into perspective by returning to the Fidelity commentary. This time, the correction occurred about 14 months after the current bull market began. Typically, bull markets have a correction around 17 months after they begin. This time, the market gained 80% before the first correction. The typical gain is 57%. The significant difference for this correction, compared to typical corrections, is the number of days to fall 10%. This time it was 27 days, which is about half the historically typical 54 days. With the last few years as a background, it is easy to understand some of the motivation to follow the crowd into bonds. We think bonds are probably more dangerous than most people realize.
Quoting directly from the Fidelity piece – “Since 1926, there have been 20 stock market corrections during bull markets, meaning 20 times the market declined 10% but did not subsequently fall into bear market territory. Whether the market recovers again from here and avoids a bear market remains to be seen, but at the very least the more surprising development based on historical patterns would have been a continued bull market rally without a 10% pause.”
Since the Fidelity piece was published, there have been several days that were dramatically up or down. As this is written, we are only about 60 days after the peak before our current volatility began. In the scheme of things, taking a week at a time, there has been little meaningful change since mid-May. We expect to continue with the portfolio philosophy that has served our clients and us well for twenty-five years.
J. David Lewis founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. Contact him using david.lewis@resourceadv.com.
June 30th, 2010
by J. David Lewis
“Is the recovery for real?”
Bryan Hankla CFP© and I were in Chicago for the NAPFA National 2010 Annual Conference during the third week of May. Continuing education credits in the stringent array of topics required by National Association of Personal Financial Advisors is important for us. This time the selection was better than usual for retirement, tax, estate planning, insurance and financial counseling. I arrived early to make a social media presentation for a study group meeting before the conference. From that, it seems I was in many informal discussions on the latest in marketing. Given the market volatility of the last few weeks, I think most people from outside our profession would be surprised how remarkably calm the attendees were on investment issues. Most of my old friends have seen so many volatile periods; we seem to feel it is a normal part of life, other than counseling to mitigate our clients’ stresses.
As always, we had excellent speakers on economics, finance and investments. This time there were two “big names” from investment management. John Rogers of Ariel Investments spoke on “The Importance of Diversity in the Financial Services Industry,” which was primarily about issues in our industry connecting with clients. Chris Davis’s topic is probably more interesting for the public these days – “Is the Recovery for Real?” I should say Chris Davis is the third generation of a family that has been managing stock investments since the 1940’s. Their investment philosophy has been consistent through all these years.
Resource Advisory Services has used Selected American Fund since before Davis Advisors assumed management in the 1990’s. The consistency they demonstrate and returns it produced through the last ten years (1.93% versus -0.19% for the S&P) provide the credibility we need from mutual funds. Yes, Selected American had a positive return during the “lost decade.” Bryan’s attention peaks whenever either Rogers or Davis presents material. This time, he was almost late for his son’s kindergarten graduation in order to hear Davis in person.
Davis started with the disclaimer all of us must understand. NO ONE can know the short-term direction of anything. He supported this with a variety of examples, like “The Wall Street Journal of Survey Economists” from 1982 through 2009. Each reading purported to predict interest rates six months in advance. They were right on the direction of change only 19 of 55 times. That is just 35% of the time. Predictions of interest rate levels were almost never even close.
The “disclaimer portion” of Davis’s talk had slides covering a variety of market and economic indicators with similar lack of predictive value, followed by an Allen Greenspan quote, “The trouble is, we can’t figure it out. I’ve been at the forecasting business for 50 years, and I’m no better at it than I ever was, and nobody else is either.”
Yet, we always expect someone to give us a prediction. The title for the talk raises attention. This doesn’t mean there is nothing to learn from the talk. Many people agree that predicting the short term is futile. Then, those same people rationalize changes in their portfolios by saying “I want to increase cash because I feel the next six months will be troubling for stocks” or “I think we should take advantage of the market being down today.” In the week after returning, we heard both these sentiments expressed with equal sincere conviction. It becomes our job to somehow help people mitigate these impulses, while understanding that both believe strongly.
This is why our education requirements include a healthy allotment of investment counseling. Is it too bold to say; “If Chris Davis, John Rogers, Chuck Royce (Click here for our piece on Royce), Allen Greenspan, Warren Buffett, and a host of other equally impressive people can admit they don’t know what will happen in six months, why do you think you know?” We need a way to share the success of people who have stood the tests of many volatile markets.
In spite of the overwhelming evidence that people cannot predict the future, it is very difficult to mentally recognize the difference between the ways we feel and the things we know. They are not the same. People seem to have an exceptional propensity to “drive their investment buses over the cliff.”
Davis had slides demonstrating the impact of decisions rooted in beliefs. From 1992 through 2009 the average stock mutual fund return was 8.8%. Wow! Shouldn’t we be happy with that? All you had to do was own an average mutual fund. Alongside this, Davis showed that the average stock mutual fund INVESTOR earned only 3.3%. The 5.6% difference is called the “Investor Behavior Penalty.” Keying off this example, he brought home the concept that good mutual fund management can go only so far. He encouraged us to understand that it is our job to help clients maintain discipline and consistency through times when acting on feelings tends to override almost everyone’s statement that they do not believe in market timing.
So, if we cannot predict what is going to happen in the next six months, how can we answer this question, “Is the recovery for real?” On January 4, Resource Advisory Services published our thoughts on the “lost decade” and what it means in the scheme of things. That piece can be found by clicking here.
With Davis’s help, we can add to those thoughts. From 1928 through 2009, just eleven ten-year periods had S&P 500 Index returns less than 5%. This in itself tells us that “lost decades” do occur and economies survive. Four of those were associated with The Great Depression and one with WWII. Four more were during the Vietnam War, when I was studying finance in undergraduate school. Now, the last two of these eleven are associated with a wildly over priced market in 1999, the Terrorist Attack of 9/11 and the most recent market trouble. Will looking at the relatively rare “lost decades” help us know whether this recovery is for real?
We can first notice that our economy has recovered from nine of the eleven occurrences and the current one is the only one that has not had time for a recovery. Let’s look at what happened after the weak ten-year periods before the recent one. They were not all negative, just with ten-year returns below 5%. In every case, the following ten years produced acceptable annualized returns. The weakest was 7% and the best was 18%, with an average of 13% per year. I don’t know anyone who would object to any of these results.
Should we follow those who predict the market for the coming six months based on whatever is happening now? Should we react from the ways we feel? We think it is better to admit we do not know about the coming six months and take our clues from much broader information. Every market crisis is different, except for all the ways they are the same. One of the ways they are the same is that many people say “this time it is different.”
January 4, 2010, we published this. “So, now we have a decade that is widely described as ‘lost,’ with ten years measured from a time when stocks were clearly overvalued. A question at the beginning of 2010 is whether stock returns have been below the trend line long enough to make another growth period as likely as the collapse was in 2000. In 2012 and 2013, the ten-year return will be measured from near the bottom of the market after 9/11. If overall stock market values stay essentially where they are now, that ten-year return can look quite respectable. If stock prices increase, that ten years can look remarkable.”
As the first months of 2010 unfolded and the rally that started in March 2009 continued, we developed increasing comfort. So, what does the volatility of the past several weeks mean in all this? Soon after we returned from the NAPFA Conference we found a piece from Fidelity Investments, which looked at past recoveries. Those rallies have followed remarkably similar patterns. In almost every case, there was a period of exceptional volatility at about this period after the low point. Except for one item, the current volatility seemed to fit those previous recoveries quite well. This time, the volatility “ramped up” faster than it did in most of the other cases, but this is only one of several measures. Otherwise, there was compelling evidence that the volatility of the recent weeks is just another normal part of recoveries.
As much as I wish we could say we have evidence that this recovery is absolutely certain to be for real, we cannot. We never can say that. Nevertheless, like our colleagues who seemed so very calm in Chicago, we have so much experience with these things; we can behave somewhat like Chris Davis, John Rogers and Chuck Royce. People who stray from the discipline do worse than those who are consistent with a good investment philosophy. It doesn’t have to be a great investment philosophy, just a good one, so long as there is discipline in applying it. The recovery will be for real, and it may be for real now.
A related amusing video can be found “It Won’t Go to Zero.”
For additional discussion of perspective read The Wisdom of Great Investors. Also, Bryan or I will be glad to discuss all the slides in the Davis presentation if you like.
June 1st, 2010
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