This is a great article on how to keep your retirement accounts safe. – Julie
Another great article for some long term perspective ~Wayne
2019 is shaping up as yet another year where non-U.S. stocks lag the S&P 500
Should U.S. investors even try to diversify their stock portfolio internationally? Many are wondering, and it’s easy to see why: international stocks, with few exceptions, have underperformed U.S. equities for quite a few years now — and not by just a little. Over the past 10 years, for example, international equities have lagged U.S. stocks by eight percentage points annualized.
A glimmer of excitement and hope among those championing international diversification happened briefly in 2017. That’s when, for the first time in five years, international stocks beat U.S. stocks — by six percentage points, no less. But that hope was soon dashed, as U.S. stocks finished far ahead in 2018. The same is true so far in 2019.
Those in favor of international diversification now have to justify their beliefs. Gil Weinreich of Seeking Alpha recently focused one of his excellent podcasts for financial advisers on whether “investors [should] finally throw in the towel on global diversification.”
Weinreich argued that investors shouldn’t, and for the most part I agree. Yet I do think U.S. and dollar-based investors need to reduce their expectations for what international diversification can deliver.
Perhaps the strongest argument for giving international diversification the benefit of the doubt is that the past 10 years are hardly exceptional, as shown in the accompanying chart. Notice that, though the S&P 500SPX, -0.13% is well ahead of the MSCI EAFE index 990300, +1.09% over the most recent 10-year period, winning over a decade is hardly unique. Indeed, during the late 1990s and the early aughts the S&P 500 was far further ahead of the EAFE for trailing 10-year return.
Yet EAFE eventually came back to life. For six straight calendar years — 2007 through 2012 — this index of international equities outperformed the S&P 500.
Clearly, recent experience appears to be unique only to investors with limited memories and no sense of history. At a minimum, therefore, there is no reason in recent performance trends alone to conclude that this time is different.
That said, it is always possible this time is different — that international stocks will never come roaring back and beat the S&P 500. If that’s what you believe, you must base it on something other than these two categories’ recent relative returns.
Why, then, do I believe investors need to reduce their expectations for the benefits of international diversification? Because those benefits have been exaggerated; it’s important to be realistic so that we do not become unnecessarily disappointed and throw in the towel.
A bit of background is helpful. One of the main benefits of international diversification is that domestic and international equities have relatively low correlation to each other. That means that one is likely to be zigging when the other is zagging, and vice versa. So a portfolio divided between both asset classes should have less overall volatility than either one individually.
The problem with this argument is that the correlation between international and domestic stocks is not constant. International stocks exhibit their lowest correlation with U.S. equities when the latter is in a bull market — precisely when you want diversification the least. International stocks exhibit their highest correlation with U.S. equities when the latter is falling, which is when you do want to be invested in another asset class with a low correlation.
Consider the annual correlations between the S&P 500 and the EAFE index since 1970. In those years in which the S&P 500 rose, the correlation coefficient was 0.34 — while it has been 0.63 in years in which the S&P 500 fell.
This idiosyncrasy of international-versus-domestic correlations is not new. Academic researchers have known about it for years. It’s just that most advisers and investors were unaware of it.
This idiosyncrasy doesn’t mean that international diversification has no benefits. It does, since a 0.63 correlation is still a lot lower than 1.0. Assuming that this correlation holds in the future, and assuming that over the long term international equities produce a rate of return that is similar to that of U.S. equities, then a portfolio divided between the two categories will have better risk-adjusted performance than a portfolio that invests in U.S. stocks only.
It just may not be quite as good as you expected.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at email@example.com
If one thing is certain, it’s that markets can be volatile. History has shown us that much of the markets long term gains come in short bursts but there’s no way to know when these periods will appear. This article illustrates just how important it is to be patient, stay the course and allow your strategy to work.
Re-posted from www.etf.com
Investors would do well to learn from deer hunters and fishermen who know the importance of “being there” and using patient persistence, so they are there when opportunity knocks.
— Charles Ellis, on investment policy
One of my favorite sayings is, “If you think education is expensive, try ignorance.” This is certainly true about investing, which is why I believe that knowledge of investment history is an important, if not necessary, condition of achieving success. The following is offered as evidence.
Distribution Of Returns
Most investors know that the U.S. stock market has historically returned about 10%: Over the 92-year period from 1927 through 2018, the S&P 500 returned 10.1%. If we were to remove the returns of the best 92 months over that period (not the best month each year, but the highest-returning 92 months of 1,104 months), what would you guess was the return of the remaining 1,012 months? I believe most investors would be shocked to learn that the answer is virtually zero.
The remaining 1,012 months provided an average return of just 0.01%. The best 92 months (just 8.3% of the months) provided an average return of 10.4%, more than 100% of the annualized return over the full period!
In case you think the above is unique to the U.S., we can also look at the data from international markets. Over the 49-year period of 1970 through 2018, the MSCI EAFE Index (gross of dividends) returned 9.1%. The best 49 months provided an average return of 9.6%, while the other 539 months returned 0.0%. Again, we see that the return of the best 49 months was greater than the annualized return over the full period.
We see the same evidence when we look at emerging markets. From 1988 through 2018, the MSCI Emerging Markets Index (gross of dividends) returned 10.4%. The best 31 months of that 31-year period provided an average return of 12.5%, while the other 341 months returned 0.0%. Again, we find that the best 31 months (an average of just one month a year) provided more than 100% of the annualized returns.
The following is a more recent example of how much returns happen in short and unpredictable bursts. 2018 was a miserable year for U.S. small value stocks—and the smaller and deeper the value, the worse the performance.
As a fund with large exposures to both the size and value factors, Bridgeway’s Omni Small-Cap Value Fund (BOSVX) (which my firm, Buckingham Strategic Wealth, recommends, and I own) had even worse returns than U.S. small value indexes. Morningstar reports that the fund lost 17.2% in 2018.
Now let’s look at what happened in the month (though in this case, not a calendar month) from the period following the stock market’s bottom on Dec. 24, 2018. On that day, BOSVX closed at 13.30. One month later, on Jan. 24, 2019, the fund’s net asset value (NAV) had risen to 15.24, a gain of 14.6%. As of Feb. 24, the NAV was 16.47, a one-month gain of 8.1% and a two-month return of 23.8%. As we saw in the three earlier examples, so much of the market’s returns come in short, and obviously unpredictable, bursts.
Perhaps it was evidence like the above that convinced Charles Ellis, legendary investment consultant and author of “Winning the Loser’s Game,” that: “The best way to achieve long-term success is not in stock picking and not in market timing and not even in changing portfolio strategy. Sure, these approaches all have their current heroes and war stories, but few hero investors last for long and not all the war stories are entirely true. The great pathway to long-term success comes via sound, sustained investment policy, setting the right asset mix and holding onto it.” (Quoted in the Barrie Dunstan article, “Global Money Masters,” Australian Financial Review, November 2006.)
Such evidence likely also influenced the thinking of William Sherden, who, in his book “The Fortune Sellers,” advised: “Avoid market timers, for they promise something they cannot deliver. Cancel your subscription to market timing newsletters. Tell the investment advisers selling the latest market-timing scheme to buzz off. Ignore news media predictions, since they haven’t a clue … Stop asking yourself, and everyone you know, ‘What’s the market going to do?’ It is an irrelevant question, because it cannot be answered.”
There are two important lessons in the data for investors. First, because so much of long-term returns occur over very brief periods, it’s critical that investors stay disciplined, adhering to their asset allocation plan and not paying attention to the noise of the market.
Second, when selling a fund for the purpose of harvesting losses, you should not wait the 31 days that are required to avoid the IRS’s “wash sale” rule before buying back the fund. This is a common error. Instead, when tax-loss harvesting, you should simultaneously buy the most similar fund you can find.
For example, to replace a U.S. small value fund, one could buy the iShares S&P Small-Cap 600 Value ETF (IJS) or the Vanguard Small Cap Value Index Fund (VISVX). You want the choice to be as similar as possible because, as you saw, even over a period as short as a month, you can have large gains, and you don’t want to have to take a short-term capital gain and pay the much higher tax rate.
If you have a significant gain, the preference should be to wait at least a year in order to obtain long-term capital gains. The gains could become so large that you might need to hold the fund for a very long time—which is why you want as similar a fund as you can find.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 130 independent registered investment advisors throughout the country.
Even if you’re not born into wealth, you can still become wealthy.
Regardless of your financial situation or education, building wealth boils down to three things: Saving, resourcefulness, and maximizing income, according to William D. Danko, coauthor of the best-seller “The Millionaire Next Door.”
His latest book, “Richer Than a Millionaire,” posits the idea that true prosperity is the convergence of good health, happiness, and wealth.
In a recent Q&A with the Washington Post, Danko was asked for his best advice for building wealth “regardless of financial situation and education.” Danko said:
“First, commit to saving 20% of your income. Currently, most save about 5%. It is hard to get ahead and be an investor without saving first.
Second, be a good steward of your resources. This includes having stable personal relationships, and good personal habits. These behaviors will lead to a longer life, and more compounding opportunities.
Third, consider having more than one stream of income. A second job can be beneficial.”
Committing to saving your income is part of setting financial goals. In fact, it’s the key to building any wealth at all, Business Insider previously reported. Specifically, 20% should be put toward an emergency fund, retirement, and paying down debt.
Danko calls it a “stretch goal” — you may not be able to save that much now, but it’s what you should aim for.
“If you earn and spend everything, you cannot build a significant financial net worth,” he said in the Q&A. “You must practice self-imposed financial scarcity. So, if you make $100,000, create a lifestyle that only requires 80% of this, and save/invest the rest.”
Research backs up Danko’s point that having a healthy personal life will lead to a longer life — studies show that fostering friendship is key to aging well and boosting happiness, Business Insider’s Erin Brodwin reported. And so do personal habits, like tweaking your diet and getting the right kind of exercise.
Finally, the more income you’re generating, the more money you’ll be able to save, so long as you don’t fall victim to “lifestyle creep.” This will also help you generate passive income, which one financial expert called “the holy grail of ways to make money.”
In fact, one Business Insider contributor has seven separate streams of income, from blogging to real estate, and he says it means he’ll never stop earning money.
Re-posted from CNBC.COM
- We tend to second-guess decisions when the market is up more than our portfolios. Don’t make the mistake of comparing your portfolio’s performance to just one market index.
- The only accurate way to track performance is based on a basket of indexes comparable to your overall portfolio.
- Educate yourself about investment, maintain portfolio diversification, invest only after careful analysis, consider your overall goals and focus on investment value going forward.
The simple answer to the question “Should I go all in?” is “Don’t do it.”
It is very difficult to stay focused on your long-term goals when the market has gone up for an extended period of time. Most people recognize the feeling they get when they watch the financial markets rally or they review their investments after a really positive couple of months and realize they aren’t keeping up with the Dow Jones Industrial Average.
We all seem to second-guess our decisions when the market has gone up more than our portfolios, and have those moments when we start thinking maybe we are doing something wrong.
The reality is that you may not actually be doing anything wrong in your investment portfolio. To that point, tracking your portfolio based on one index is definitely not the way to measure performance.
Remember the Dow is 30 stocks of 30 different companies. It is not a good benchmark for determining if your portfolio is performing well, for two reasons.
First, it includes only 30 stocks out of the thousands traded on other exchanges. Second, because of the way the index is calculated, higher-priced stocks exert a greater influence over the index than lesser-priced ones. If your portfolio is invested in many different asset classes, comparing your overall performance to an index like the Dow isn’t very helpful or accurate.
The only accurate way to track your performance is based upon a basket of indexes comparable to your overall portfolio. For example, if you own mutual funds that invest in U.S. small cap stocks, the best index for comparison may be the Russell 2000. If you are looking at U.S. large cap stocks, the S&P 500 is a better measure than the Dow since it is a broader-based index with 500 companies, compared to 30 for the Dow.
I have had many questions from investors about whether they should increase their equity exposure, and consequently the risk in their portfolio.
For many the answer is no, but for some it is a matter of reviewing whether the potential increased return outweighs the increased risk that has to be taken. The best way to view this risk-reward relationship is by looking back at periods of time where we had either a really good market or a really bad one.
Regarding the latter, the two years that come to mind are 2008 and 2009. So if your portfolio lost 20 percent in 2008 but would have lost 30 percent with an increase in equity exposure, this is a start for determining the extent to which that extra risk impacts a specific portfolio.
The next step is to translate that percentage to real dollars. When we look at a percentage loss of 20 percent or more, we can rationally or intellectually say “Sure, I can deal with that.” But once we translate it to real dollars, it has a different feel. So a 20 percent loss may seem OK but, if it represents a $10,000 or more loss in real dollars, it may not be so easy to accept.
Maybe there are things you could do to more effectively manage your portfolio but it is not an all-or-nothing decision. Given the uncertainty surrounding the financial markets these days, now is a great time to take a good look at your portfolio. As you review your overall portfolio and the investments in it keep the following in mind:
- Think about your overall goals and objectives. What are you trying to achieve with these dollars? Can you target a higher return and accept higher risk and still reach your objectives? If not, take it slow increasing the risk of your portfolio.
- If you don’t have a financial plan, this review is a great reason to develop one starting right now. Planning now means a lot less stress and regrets later. Think about what a financial plan could mean to you and your family. A major benefit is that it keeps you focused and on track for the longer term and not just the short term.
- Make sure you understand the basics of investing, even if you hire a professional to help you manage your money. You need to understand the reasoning behind how your dollars are managed.
- Review your overall asset allocation to make sure it makes sense for you. The overall asset allocation and the asset classes you select are the most important part of building a solid investment portfolio for the long term, and the primary determinant of your portfolio’s overall performance over the long term. Make sure you rebalance periodically to bring it back in line with your original asset allocation if there has been no change in your financial situation or investment objectives. If there has been, you need to revisit your original asset allocation. If you originally targeted 30 percent in bonds and 70 percent in stocks, is this what you currently have?
- Review each individual investment. If you own a stock, is it still a good company? If you own a mutual fund, is it performing like comparable funds? If not, why not? Would you buy it today? Slow down and really think about the investments you currently have. Even if an investment has lost money, it is not necessarily a bad long-term investment. Don’t just react to what is going on in the markets today.
- Maintain that diversification. Don’t let any stock or fund take over your portfolio. Even if an investment has done really well, make sure you take profits and don’t let it take over too much of the value of your portfolio. Diversification doesn’t mean having many different advisors or many different U.S. large cap stock funds. It means having investments in U.S. large cap stocks, U.S. small cap stocks, fixed income, international, emerging markets and various other asset classes. Investing in asset classes that can help diversify your risk is critical.
- Purchase new investments only after extensive analysis. That means don’t buy the latest hot investment or buy something on a friend’s or neighbor’s hot tip, or the one that has gone up the most this week.
- Focus on the investment value going forward and not just on past performance. Past performance is only one indicator and not necessarily a predictor of future performance. If you are investing in a mutual fund, all else being equal, stick with the fund with low expenses. Funds with lower expenses have to take less risk for the return.
- Think about the basics of investing. You want to buy low and sell high, not the other way around. Don’t get caught selling something after it may be close to a bottom, especially if you believe it is still a good company or a good mutual fund. The flip side is, don’t fall in love with an investment and hold onto it in spite of continuing poor performance.
- If you aren’t sure what to do, or you find yourself unable to make a decision, hire someone to help you. There are many very good financial professionals out there that are capable of helping you work through some of these tough decisions. Don’t be afraid to ask for assistance in a difficult market.
The bottom line
The bottom line: Don’t make the mistake of moving in and out of investments trying to find the “right answer” in a volatile market. Unless you have a crystal ball, a diversified portfolio is still the right answer to most investment questions.
Remember that many investors lose money not because of bad investments but because of really poor timing of buying and selling investments. This happens because by the time they are convinced that the market is going down forever and actually sell may be right before the market does go up. It is also true of rising markets. You cannot time markets no matter how smart you are so invest in a diversified portfolio and keep rebalancing.
“Sooner or later the market will back up. … Until then, keep that go-for-broke mentality under wraps and don’t let emotions control your investment decisions.”
This time is not different and the market will not go up forever. The key is to plan your investment program, select individual investments carefully and don’t make changes without extensive analysis. And remember that mantra: “I am a long-term investor, I am a long-term investor, I am a long-term investor.” You get the idea.
Like any other bull market, this one will not last forever. Sooner or later the market will back up and we will once again experience the fear that is the other part of the equation. Until then keep that go-for-broke mentality under wraps and don’t let emotions control your investment decisions.