Here’s a sampling of the headlines I took from just today about the election and its impact on the stock market:
Stock Futures Plunge as Donald Trump Posts Surprising Win
Trumped! Dow Tumbles 254 Points on Trump Victory, Republican Sweep
Wall Street to open sharply lower in wake of U.S. election
U.S. stocks crumble on Trump's upset victory
Dow surges to near-record highs following election of Trump
Stocks Surge After Trump Victory
Wall Street surges after Trump wins White House
Again, those are just today’s headlines. Depending on which time of day you hopped online to see the latest financial headline you might draw the conclusion that the end of the world is near (“DOW tumbles”) or it’s not as bad as it seems (“DOW surges”).
It’s important to remember to keep your eye on the long-term movement of your retirement portfolio - the long-term movement remains to be seen based on today’s election results – but historically the long-term movement has had only one direction…UP! And I fully expect that direction to continue over the coming years.
For those of you with heavy stock market exposure we’ve determined your time horizon is long enough to support it, and today’s wild movements have very little bearing on the long-term performance of your portfolio. For those of you with a shorter time horizon we’ve determined your stock exposure should be limited and the bulk of your retirement savings is to be invested in capital preserving investment grade bonds, therefore you are already positioned in a portfolio that can absorb drastic movements in the stock markets.
In short, rest easy and love or hate your new President!
Q3 2016 MARKET SUMMARY
Here you will find DFA's Market Summary for the 3rd quarter of 2016. This market summary report concludes with the article I sent out a few weeks ago about the Presidential elections and their impact (rather, lack thereof) on the stock market. The last line in it: “…there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns” touches upon the foundation of long-term retirement planning.
Patience – the bulk of our investment returns for retirement are generated near the end of our time spent saving for retirement, this time is known as the accumulation cycle, where we accumulate wealth for retirement. This happens because throughout our working years our investments are compounding, in other words, our money generates money, and then that money generates money, and so on. So as our retirement pie compounds the larger it gets will then allow for it to get even larger. Typically the pie is the largest near the end of our accumulation phase when we stop earning an income and we begin to withdraw from our savings to live.
Portfolio Structure – a key foundation to successful long-term investing is to have the right investment portfolio in place. The right investment portfolio is one which gives our money exposure to thousands of companies from across the world, these are big companies we see everywhere and we use their products, services, technology, and innovations every single day, and these are small companies we’ve never heard of before and we might never come across them in our daily lives, and a bunch of companies in between, too. All of these companies make up for a globally diversified portfolio in which we invest our money and with patience see it grow as these companies grow too and share their growth and profits with us.
THE ELECTION AND ITS IMPACT ON YOUR RETIREMENT
"Over the long run, the market has provided substantial returns regardless of who controlled the executive branch.”
There’s a common sentiment that comes around in the summer and fall every 4 years and it’s ‘I’ll wait to see what happens with the election before I do anything.’ The problem with this thinking is the market never tells you when something is about to happen, moreover, it never tells you when it’s about to take off or drop like a rock. No matter who wins, the immediate outcome will be one of three scenarios: 1) the market will go up, 2) the market will go down, or 3) the market won’t go up or down. My job is to make you ignore the short-term movements of the market (which are entirely random and fall into one of the three above scenarios), instead, I want you to focus on the long-term movements of the market, which always fall into scenario one above. And that is why it is imperative we remain invested every single day, doing so over the not so important short-term means we’ll participate in all three scenarios, but over the extremely important long-term ensures we’ll participate in the only market scenario: scenario one.
Below is neat graph and sound conclusion taken from this DFA article:
CONCLUSION Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.
Q2 2016 MARKET SUMMARY
Hello all, here you will find DFA's Market Summary for the second quarter of 2016. I don’t expect you to read the whole deck, but I always try to find a page or two to point out to you, typically it’s the last page, but this time around I honestly couldn’t think of much to say about the last page; instead you should check out page 4.
The quarterly reports always contain this page (which highlight global events against the backdrop of the performance of the MSCI All Country World Index), but I think this time it’s notable for the “Brexit” event we saw less than 3 weeks ago. You’ll see how the market’s reaction was a very sharp move down (and don’t forget stock markets are just made up of people buying and selling stock to and from each other), but you’ll also see the drastic move back up [as I’m writing this email the US stock market as measured by the S&P 500 Index is at an all-time high], this is why it’s imperative we don’t react to ‘the sky is falling’ short-term news when we’re investing for the long-term. And as I always say if we’re investing heavily in stocks then by nature we’re investing for the long-term.
After the Brexit event on June 23, I had no idea if our stocks portfolios would continue to go down in value, stay flat, or sharply rise, but I did know I wasn’t going to panic and I wasn’t going to let one day of stock market movement derail a lifetime’s plan of stock investing for your or my portfolio.
We will be greatly rewarded if we always stay the course in a broadly diversified portfolio and as our appetite for risk/reward changes, then, at that time, is when we react and raise or lower our stock exposure. We decide when to raise or lower our stock exposure, we don’t let others in the market decide for us.
Please contact me with any questions.
THE PRICE YOU PAY FOR TRACKING A MARKET INDEX
When I talk about the DFA mutual funds in which our money is invested I try to explain how they are like index funds, but not really – I admit this can be a confusing answer. First, an index fund can be defined this way…
An index fund is a mutual fund designed to match the components of a market index. Probably the most well-known example would be an index fund that is designed to track the performance of S&P 500 Index. Generally, index funds provide broad market exposure (thus reducing risk), low operating expenses (thus reducing fees) and low portfolio turnover (thus reducing the impact of taxes). In short, the saying “if you can’t beat ‘em, join ‘em” is perfect here.
DFA has released a short article explaining how index funds can be adversely impacted due to their requirement to strictly adhere to tracking a market index. The attached paper explains how DFA funds allow for more buying and selling flexibility than index funds thus reducing their costs to buy and sell, which, in turn, is a cost savings that is passed on to us, the investors in their funds.
I encourage you to give this article a read and to let me know if you have any questions.
MARKET VOLATILITY: WHAT IT IS AND HOW TO HANDLE IT
The stock market has been extremely volatile as of late. Consider August 24, 2015, when the Dow opened down nearly 1,000 points and as of this writing has rebounded nearly 700 points. Volatility is like a roller coaster and today is probably about as wild of a roller coaster for one to be on.
However, never forget that volatility is driven by emotional buying and selling, and investors (not traders), like myself, don’t let our emotions determine our long-term investment strategy for retirement. Part of the reason our clients hire us is to keep their emotions in check, so that they don’t get off of the roller coaster before it comes to a complete stop. The complete stop is when you’re ready to stop investing in the wealth generating tool that is capitalism. Are you at that point today?
Remember, when you invest in the stock market you are lending your money to businesses across the world; in finer detail, you are lending your money to ideas, innovation, advances, technology, people and entrepreneurship – these six elements are at the core of capitalism and over the long-term you will benefit and profit from capitalism and its elements.
Long-term is key here, because today’s wild volatility is still only one day of stock market movement. The stock market is very volatile, but over its extended history it has only moved in one direction – up.
Down markets present opportunities for you to lend your money to capitalism at lower prices than you were previously lending money to it. This isn’t bad news, this is great news. So look at market sell offs or extended periods of down markets, known as bear markets, as great opportunities to buy great companies at great prices. Therefore, we use these times to rebalance our portfolios where we sell some investments and buy others. Over time rebalancing actually gets us to ‘sell high’ and ‘buy low’ which has proven to be a great long-term wealth building strategy.
As for me, I personally feel no different about my retirement portfolio today than I did yesterday because I’m keeping my emotions in check and not letting their short-term effects on me determine my long-term strategy. And I make sure my clients feel the same way.
I’ve come across this great quote several times and from several different people so I don’t know who to credit with it: “I don’t (and no one else knows either ) whether the next 10% move in the market will be up or down, but I can tell you the next 100% market move will be up.” For clients of Pensinger Financial it is our goal to make sure they participate in the next 100% move up, all we ask is that they ride out the 10% (and more) up and down swings with us and don’t let their short-term emotions cause them long-term harm.