Tag: Stock Market

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You Can’t Time the Market

Photo: Kelly Sikkema | Unsplash

We’re reprinting this column from October 2021 because it’s always time to resist temptation.

We get a lot of questions about how to buy and sell to take advantage of short-term volatility in the stock market.

These questions usually come up when …

• There has been a sustained period of good performance. (It can’t last, right?)

• There has been a sustained period of bad performance. (Is this going to get worse?)

• The markets have moved up and down a lot. (Don’t choppy markets signal danger?)

Some people are always convinced that a big downturn is just around the corner.

There’s an old joke about gold miners who have an accident and are waiting outside St. Peter’s gate in a long line. An impatient miner in the back shouts, “Gold struck in hell!” and all the miners eagerly run away. Then the impatient miner starts to follow them, much to St. Peter’s surprise. The miner explains, “Well, I guess I’ll go with the gang — there might be some truth to that rumor.”

In the same way, completely rational people — even investment professionals — will try to time markets even though they know better. It’s just too tempting.

I have many conversations like this:

Them: “Will you call me when the market looks like it’s about to go down, so I can sell first?”

Me: “That’s not something we can do. Nobody in the world has ever demonstrated a sustained ability to sell at the top and buy at the bottom. There’s always bad news out there, but markets climb a wall of worry. If you do call a top, it’s even harder to buy back just at the right time because the market bottom will be at the moment of maximum pessimism and you won’t want to get back in.

“You should focus on investing your money consistently over time, believe in the rebalancing process, and not worry about the small perturbations (or even large perturbations) in the markets. You’re in it for the long run. You’ll miss the big upside if you’re in cash waiting for the next big downside.”

Them: “That all completely makes sense and I understand. I’m on board with the plan. But seriously, can you just please call me if the market looks like it’s about to go down?”

Selling at the top is hard, but there is a way to buy lower consistently, and that’s through the magic of a bond allocation and a rebalancing process. The purpose of bonds is not just to produce income. They tend to perform well when stocks stumble (or at least they don’t fall as quickly), so they can provide a source of cash to buy stocks when they’re on sale.

Let’s look at a hypothetical example.

Say you have $100,000 with 80 percent in stocks and 20 percent in bonds. Your stocks decline 10 percent and the bond market is unchanged. Now your portfolio is $72,000 in stocks and $20,000 in bonds, or about 78 percent stocks and 22 percent bonds. If you rebalance back to target, you will sell about $1,600 of your bonds and use the proceeds to buy stocks.

This small transaction might not seem like much, but it adds up in the long term. It’s a real way to buy stocks low(er) without having to worry about timing things perfectly.

Market timing is exhausting and simply doesn’t work, in our experience. Rather than looking for a better market signal, committed market timers probably should look for more bonds to dampen the downside of a market correction and take advantage of that opportunity to buy lower. Even in a world of low expected bond returns, they perform a very important function for risk-averse investors. The time to sell high is in retirement, after a lifetime of compounding through good markets and bad!

Gene Gard, CFA, CFP®, CFT-I™, is a Private Wealth Manager and Partner with Creative Planning. Creative Planning is one of the nation’s largest registered investment advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Thankful for the Markets

Capital is magical. (Photo: Picas Joe | Pexels)

As another Thanksgiving has passed, one of the things I’m thankful for is our modern global capital markets. The ability to retire by putting money to work in markets which provide a long-term positive real return is a very recent development on the long scale of humanity. Just as importantly, we can take money out with daily liquidity to fund retirement or other needs — though unfortunately this liquidity also facilitates less constructive activities like market timing and day trading.

As someone involved in the markets daily, it’s easy for me to take all this for granted. I was reminded that not everyone understands the long-term power of markets when I heard this question: “I understand I need to save for the future, but the idea of market volatility is very distressing. What if the market is having a downturn just when I plan to retire and my investments are losing money when I need them in 20 or 30 years?”

If you retire 30 years from now, your positions may be off their all-time highs, but the likelihood of actually being down on diversified positions you buy today is vanishingly unlikely. Despite the best justifications from financial media, usually there’s no particularly good reason for stocks to be up or down a half a percent in a given day. But as the days turn to years and the years turn to decades, stocks have almost always gone up.

In fact, I can’t find a single 30-year period where a broad U.S. stock index has experienced a negative return. Even finding a losing 10-year period is difficult — and after those bad periods usually very attractive returns are soon to follow.

These attractive long-term returns above inflation are really an afterthought of our modern capital markets, not the purpose. Equity markets exist to finance the continued rise of civilization. Money under your mattress is just money, but when invested in the stock market it becomes capital — something truly magical. The returns from the market that allow us to retire are just a by-product of the fact that capital accomplishes something. The inexorable rise of the stock market over time is not reflective of numbers bouncing up and down on a screen; it’s reflective of capital doing its work to continue to build out the greatest civilization the world has ever seen.

There will always be market downturns, corporate missteps, accounting scandals, and Ponzi schemes, but even in a tough year like 2022, we can be thankful for the historical returns in the market. Will the magic continue? As long as productivity growth continues, technology advances, and inflation stays under control, the answer is likely yes.

We may have to measure things in different ways — for example, as demographic trends slow, we might have to measure the strength of the economy by GDP per capita rather than absolute GDP. Nevertheless, we continue to enjoy the best quality of life any generation has ever achieved. Even kings and queens of ages past didn’t have access to things like air conditioning, modern sanitation, immediate access to food from any season, and streaming entertainment. All of these things (financed by capital markets) are truly something to be thankful for.

We are all looking forward to what 2023 might bring, but there’s still a lot to celebrate before we draw the curtain on 2022. Markets have been disappointing this year, but December could still bring good news. Whether or not we see a positive December, you’ll be thankful for consistently investing through down times in the market once the inevitable market recovery ensues. We all benefit from the markets indirectly, but to get the most out of them personally, you have to be invested!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com.

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Investing in Uncertainty

Photo: Andrii Yalanskyi | Dreamstime.com

As part of the Observatory (our financial planning process), our investors unsurprisingly end up with, well, investments. These allocations are based on client need, desire, and ability to take risk, and the allocations tend to not frequently change over time. A client’s portfolio here is not based on an assumption of all sunshine and rainbows, but rather a review of history, including market declines in March of 2020, 2008, 2000, 1987, and even more obscure disturbances like the events of 1997 and 1937.

In our Observatory process, we don’t model any sort of attempt to predict or avoid these events. Instead, we model a disciplined approach of staying invested and taking opportunities to rebalance into equity markets after drawdowns. This approach has worked well in the past, and our view is that it will continue to work in the future. Nevertheless, there’s a fundamental human desire to avoid risk at all costs, especially when things seem particularly risky, and there are always a few clients eager to “get defensive until the uncertainty subsides” in every market environment.

For our investors, we believe we preemptively position defensively through allocations to short- and intermediate-term bonds. Those bonds aren’t there for the good times — in fact, they are a drag on performance when stock markets are strong. Bonds shine after a serious stock market downturn when they possibly contribute some total return. More importantly, they serve as a source of cash to rebalance into equities (just when equities have declined and become more attractively priced). We believe selling stocks and adding to bond allocations or going to all cash after a big market decline is the worst time to do so.

I was listening to the radio recently, and the host asked a guest, “… but what’s the point of economic modeling at a time of such great uncertainty as this?” I couldn’t help but laugh out loud. The host was referring to the Ukraine invasion, and he seemed to be implying that a forecast made the day before Russia invaded would be much more appropriate than one made the day after since so much “uncertainty” would be introduced by the conflict. I laughed because all forecasts are equally based on ex ante information and therefore don’t incorporate the unknowable future. Forecasts made confidently when things seem certain are likely the worst forecasts of all! The situation in Ukraine has become more certain today than at any time in the last decade or so. The greatest unknown — the question of whether Russia would dare a full-scale invasion of Ukraine — is uncertain no longer.

Stepping back, when in the past was there not uncertainty? Markets have performed exceptionally well for many decades, but we know that only because of the prescience of hindsight. Following the 2008 financial crisis, the U.S. stock market bottomed out quickly in March of 2009 and has provided extremely attractive returns ever since, but we sure didn’t know that was going to happen back then. There were concerns that banks would fail, cash would stop coming out of ATMs, and life as we know it would grind to a halt. The last decade was an exceptional one for investors, but who could have credibly predicted that in 2010?

As Yogi Berra said, it’s tough to make predictions, especially about the future. We are certain that the future will contain some difficult times, and that’s okay. If we devote all our efforts to avoiding the bad times, we’ll miss the good times too. If history is any guide, the good times will continue to be good enough to offset the bad in the years and decades to come — but only if you stay invested.

Gene Gard CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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Up and Up? The Stock Market vs. Bitcoin

Is Bitcoin worth the investment? (Photo: Bermix Studio | Unsplash)

For many people, the stock market is a big casino. Stocks go up, stocks go down, and there’s no telling when it will happen or why. That’s true to an extent, but unlike truly random processes, there are many forces at work that reliably pull stock markets upwards over time.

Bitcoin is an example of a market that does not work like stocks. While some have suggested “fundamental” reasons that crypto assets rise and fall, at the end of the day they go up because more people want to buy them, and they go down when more people want to sell them. Given the nature of Bitcoin and other cryptocurrencies, the main reason people want to buy them is because they speculate others will want to buy more in the future and the price will go up. This leads to a speculative cycle of ups and downs that is exhausting.

Bitcoin as an investment is very similar to other “nonproductive” assets like gold, silver, oil, or art. While they might appreciate over time because people either need them or want them, they exist only to be consumed or owned.

Supply and demand influences stocks as well, but there is much more going on behind the scenes when you think about investing in a publicly traded company.

One way to think about a stock is that it is a black box. To get it started, you have to open up the box and put some money (capital) into it. Then, as long as everything goes well, money starts coming out of the black box — like an ATM — over time. You’re not just getting your money back. Over time, you can take out a large amount of money as profit and that initial capital can grow far beyond the amount you put in.

The income that flows out of the black box of a publicly traded company is special. It tends to increase over time as productivity, population, and GDP grows. It tends to rise as inflation increases. It benefits from technological advancements. If you diversify into a lot of these different black boxes, they can be a pretty reliable way to make money in the long run, even if sometimes the money slows down or even stops for short periods of time.

There might be a lot of demand for Bitcoin in 10 or 20 or even 100 years — or there might not. It’s almost impossible to know whether or not interest will continue or the next big thing will come along and make it obsolete.

We can say with much more confidence that there will be interest in 100 years in stocks. Tastes change, but people are likely to always be interested in black boxes that create money! Black boxes of Bitcoin or gold might have more money in them when you open them in the future, but they don’t produce any sort of earnings.

There are no guarantees in investing — it’s easy to lose money in the short term. But in the long term, stock prices are not a random squiggle of lines representing a meaningless random process (like Bitcoin). There is an almost gravitational force that has pulled stock prices upwards over our lifetimes, and it’s likely those same forces will continue to pull stock prices up into our retirement years and beyond. Bitcoin, gold, oil, or art might make a lot of money for you, but in our opinion, a diversified portfolio prominently featuring stocks is the most reliable path to a secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at
ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

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FedEx Shares Drop on Loss News

From MarketWatch.com: FedEx Corp. said Wednesday that it swung to a fourth-fiscal-quarter loss from a year-earlier profit, reflecting a $696 million after-tax asset-impairment charge tied to the acquisition of Kinko’s, as well as a surge in fuel prices and a weak U.S. economy.

The Memphis-based shipping business, sometimes viewed as a bellwether for the broader economy, also provided a first-quarter and fiscal 2009 outlook that were below Wall Street’s earlier expectations. That helped to send shares down nearly 3 percent.

Read the rest of the bad news at MarketWatch.com.