Stocks on Sale

U.S. stocks have already seen two pullbacks greater than 5% so far in 2018, as measured by the S&P 500 Index. That compares to only one pullback over 5% in the last 2 years. To say that recent stock swings have been jarring would be an understatement. While sharp declines in prices are unpleasant, equity volatility has been unusually low since the Financial Crisis ended in 2009. Unprecedented support from the Federal Reserve coupled with steady economic growth has pushed stocks steadily higher for 9 years.

As a result, investors have gotten used to smooth and steady stock market gains. But our experience since 2009, in which the S&P 500 Index declined 5% or more only 10 times, is not the norm. Going back to 1945, on average the S&P 500 Index has experienced declines of 5% or more every six months – almost double the frequency of pullbacks we’ve had since the Financial Crisis. While the recent past has been a pleasant ride, market volatility is likely to increase going forward, which may not be a bad thing.

A friend of mine and savvy stock investor once told me that she loved market pullbacks. “It’s like a sale,” she said, “…an opportunity to buy quality products at discounted prices!” Her analogy stuck with me over the years and today I view market pullbacks as opportunities rather than a reason to panic.  Granted, training my brain to think this way took some time and effort. But as an investor, it is an endeavor worth pursuing.

Consulting firm, Dalbar, provides an excellent reason to re-frame your thinking regarding market pullbacks. According to their research, while the S&P 500 Index has delivered an annualized trailing 10-year return of 6.95% through 2016, the average investor return was just 3.64%! Even more striking, the average investor earned a 4% annualized return over the trailing 30-year period compared with the S&P 500 Index’s 10% annualized return for the same period!

As the data clearly indicates and as Dalbar notes, “Investment returns are more dependent on investor behavior than fund performance.” These well-below market returns happen because investors tend to sell their stocks (and bonds) as prices are falling or bottoming. Instead of buying low and selling high – the tried and true way to grow wealth – a lack of investment discipline causes many retail investors to do just the opposite. To compound matters, after selling their stocks and funds during market downturns, many investors – scared from the market turbulence – typically sit on the sidelines as markets recover and therefore never recoup their portfolio losses.

While not all market declines present perfect buying opportunities, falling asset prices do present a chance to add to positions at lower prices. Stocks (and bonds) are on sale! Sometimes downturns are longer and more severe than we would like or expect. However, timing the market is a losing game. Research suggests that taking a long-term approach to investing, regularly rebalancing your portfolio to an appropriate target allocation, and staying invested through market downturns significantly increases the odds that you reach your long-term financial goals.

Weathering market turbulence is not for the faint of heart – which is why a financial advisor can be such a valuable asset. During turbulent market environments your advisor will guide you through market downturns, rebalance your portfolio to take advantage of lower prices, and ultimately remind you why you’re invested. On that note, we’re grateful you’re our client!

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The Tried-and-True Way to Build Wealth

In today’s ultra-connected world it’s even more tempting to compare ourselves to our family, friends, and neighbors. Are we falling behind in our career? Is our family life sub-par? Should we be making more money? Although we all know that people post their best images and experiences on social media, it’s easy to forget that we are tuning in to a lop-sided view of reality. Ironically, this warped perspective can encourage ideas and behaviors that move us further away from what we’re trying to find: a happy and rewarding life.

At Parsec, we work with one aspect of a happy and rewarding life: helping our clients reach their long-term financial goals. Often these include becoming financially independent and retiring comfortably.  While social media and the popular press would have you believe that the right image, owning an expensive car or home, and living a lavish lifestyle translates into financial success, it doesn’t. What does lead to financial independence – and happens to be highly correlated with happiness – is much less glamorous and a lot simpler. It’s the age-old adage of living below one’s means.

Although it’s not sexy, spending less than you earn month-in and month-out is one of the most dependable ways in which to accumulate wealth. Sure there are a handful of folks who will strike it rich with the next great idea, but for the vast majority of us, we will earn our livelihoods working for a company. This is good news, really. The risks are much lower with a nine-to-five job, along with stress levels, and the path to financial independence is quite clear. Time and again, research confirms that spending less than you earn while regularly contributing to a low-cost, well-diversified investment portfolio can lead to significant wealth accumulation.

No, it’s not very exciting and unfortunately, it’s not that easy either. We can see how difficult it is for Americans to live below their means by examining our aggregate retirement savings metrics. According to the Economic Policy Institute (EPI), the median retirement savings of all working-age families in the U.S., defined as those between 32 and 61 years old, is a mere $5,000! That stands in stark contrast with the amount of money most experts suggest we need to retire at age 67. While retirement savings will vary considerable from one person to another, one rule of thumb recommends having ten times your final salary in savings. Given a median U.S. income of $59,039, this suggests that the average American needs about $590,390 in savings to retire.

So why is it so difficult for most Americans to live below their means? Of course, it varies from person-to-person, but there are some recurring themes. In general, Americans seem to want instant gratification more so than in the past. One theory is that as an over-worked, time-crunched culture, we are dealing with higher stress levels than earlier generations. We then try to manage our stress by turning more and more to material things and experiences. While we know intellectually that spending on items we don’t really need only provides temporary relief, our tendency to accumulate things often becomes habit-forming. Big money problems can then arise when our need for immediate gratification gets paired with a lack of financial awareness. America’s current retirement savings situation reflects just such a scenario.

All that said, if you are reading this article it suggests you have or are starting to cultivate financial awareness, which we believe is a big part of the solution. As we start to question our spending motivations individually and as a culture, it will help us become clearer on what we’re really after and how to get there. While we are a vastly diverse nation of people, it would seem that at the end of the day most of us are after the same thing: a happy and fulfilling life.

Once we realize this, we can start to eliminate habits or tendencies that get in the way. We can start to simplify our lives and spend our time, energy, and money on things and activities that contribute to a happy and fulfilling life. Doing so naturally helps us live below our means and comes with the added benefit of reduced stress levels. From a financial perspective, a simplified lifestyle not only helps accelerate your ability to save for retirement but it means that once you reach retirement, you will require less income in your golden years. Starting to live below your means early-on, questioning your spending motives, and simplifying your life can become a virtuous cycle that suggests your retirement years can truly be golden.

Carrie Tallman, CFA, CFP®

Guest Blogger

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Why Trying to Time the Market is a Losing Game

The U.S. stock market has returned 282% since bottoming in March 2009, following the Financial Crisis.  Since that time, the S&P 500 Index has delivered positive returns in seven out of the last eight years and appears poised to produce another gain in 2017.  While it’s true that valuation levels are above long-term historical averages, in this email we’ll explore why trying to time the market is a losing game.

As a client you may be concerned that higher stock valuation levels coupled with a long-running bull market could mean an imminent pullback.  If so, you’re not alone.  Many investors have noted that it’s been a while since we’ve had a major stock market correction (defined as a drop of 10% or more).  This makes sense given that historically, the stock market has averaged three pullbacks of about 5% per year, with one of those corrections typically turning into a 10% or greater decline.  While it has been twenty-two months since our last market correction, we’ve seen longer.  Since 1990, we’ve experienced three periods lasting longer than twenty-two months over which markets did not experience a 10% or greater pullback.  So although we’re not in uncharted territory, the historical record suggests we could be closer to a market decline than not.

Given the above facts, clients often ask why we don’t sell stocks and raise cash in order to avoid the next market correction.  It’s a fair question, but when examined more closely we find that it’s a very difficult strategy to implement successfully.

Research has shown that trying to time the market is a losing game.  One reason is that an investor has to accurately predict both when to get out of the market and when to get back in.  While it’s difficult enough to time an exit right, the odds of then correctly calling a market bottom are even lower.  Part of this relates to the nature of market declines.  Looking back to 1945, the average stock market correction has lasted just fourteen weeks.  This suggests that investors who correctly sell their stocks to cash may be sitting on the sidelines when equities surge higher, often without warning.  While moving into cash may avoid some near-term losses, it could come at the higher cost of not participating in significant market upside.

Another reason to avoid market timing relates to the nature of market returns.  History shows that since 1926, U.S. large cap stocks have delivered positive returns slightly more than two thirds of the time.  As a result, you’re much more likely to realize higher long-term gains by remaining fully invested in stocks and weathering some of the market’s admittedly unpleasant downturns.

At Parsec, instead of market timing, we recommend investors stay invested throughout market cycles.  While this can be difficult at times, investing in a well-diversified portfolio has been shown to help mitigate market volatility and provide a slightly smoother ride during market downturns.  This is because portfolios that incorporate a thoughtful mix of asset classes with different correlations can provide the same level of return for a lower level of risk than a concentrated or undiversified portfolio.  It also ensures that investors participate in market gains, which often materialize unexpectedly.

In addition to constructing well-diversified portfolios, we believe in setting and maintaining an appropriate asset allocation based on your financial objectives and risk tolerance.  We then rebalance your portfolio to its target weights on a regular basis.  This increases the odds that you sell high and buy low.

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The Benefits of Focusing on Your Long-Term Financial Goals

As your advisor, our main focus is helping you reach your long-term financial goals.  We say this a lot, but it bears repeating.  It’s worth revisiting because near-term portfolio returns and market noise can distract even the best investor from remembering why he or she invests in the first place.  For most of us, investing is about creating the life we want, giving back to family, friends, and community, and leaving a legacy.  At Parsec, our job is to lead you through difficult market periods, including times when your portfolio may lag the major market indexes.  Every portfolio will experience underperformance from time-to-time.  However, getting caught-up in weak near-term performance can actually hinder progress towards your long-term goals.

This happens when we lose sight of the big picture.  Asset class leadership naturally ebbs and flows over the course of any economic cycle, and so too will portfolio returns.  Financial behavioral scientists suggest that if we’re caught-up in near-term underperformance we’re more likely to act reactively instead of proactively.  Reacting to current portfolio performance increases the odds that we sell low, buy high, trade excessively, or even sit-out the next market run.  In other words, focusing on near-term market moves increases the odds that we hinder our long-term performance results.

In contrast, measuring your progress versus your long-term goals is more likely to increase proactive behaviors and thus improve the odds of realizing your objectives.  For example, framing portfolio returns in the context of your retirement savings target several years from now is more apt to help you keep calm during periods of market turbulence.  “Keeping your eye on the prize”, as they say, can cultivate resiliency and has the added benefit of lowering your anxiety levels.  When you’re less stressed, you’re more likely to engage in proactive behaviors like maintaining an appropriate asset allocation mix, rebalancing back to your target regularly, and staying invested during market downturns.

While we acknowledge that portfolio declines or underperformance is never fun, it’s important to recognize that difficult performance periods are par for the course.  Over time some assets and sectors will outperform while others will lag.  Rather than trying to time the market or catch the latest trend – which is extremely difficult to do – sticking with a diversified asset allocation and rebalancing regularly is a tried-and-true method for achieving your financial goals.

With that in mind, our job is to help you stay focused on the big picture.  Doing so lowers the odds of engaging in detrimental behaviors and increases your chances of success.  When you succeed, we succeed!

Thank you,

The Parsec Team

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