February 5, 2019
“Buy and Hold” Is Getting Old
Since almost all investors had a poor year last year thanks to the bear market of 2018, it seems fitting to discuss risk management, which buy and hold investors have none of.
Buy and hold works fine over very long periods of time, with most studies about it looking back over more than 90 years of data. However most of us don’t have 90 years before we will want our money, and that is the rub.
During the 19 years ending December 31, 2018 the S&P 500** index, considered representative of the US stock market, earned an average annual return of only 2.86% on a closing price basis. (Data from FastTrack). Multiple large declines over that same 19 years leave many buy-and-hold investors discouraged so let’s look at an alternative, a modified buy-and-hold strategy called proactive management.
Proactive risk management is the key to facing whatever lies ahead in the market. It goes beyond simple asset class diversification and also diversifies by strategy. If you believe that diversification reduces risk, this added level diversification can provide added risk management. Now is the time to apply proactive risk management to those dusty stock and mutual fund portfolios before the next bear market hits.
Consider this comparison of two hypothetical portfolios:
Even though the proactively managed Portfolio B earned only about one half of Portfolio A in the good year, it lost only one half as much in the bad year. The math of gains and losses means that Portfolio B yields better results through the full market cycle, yet most investors will still choose the traditional buy-and-hope-it-works-out portfolio because of the 35% gain in year 2.
However, by being satisfied with modest gains as a trade-off for limited risk, the proactively managed investors owning Portfolio B would have significantly more money to invest when the market cycles back into positive territory.
How should today’s investor manage risk?
With such volatile markets, today’s investor can’t afford to be tied to inflexible buy-and-hold investment strategies. Those who do so risk getting flattened by extreme market downturns as we saw in 2018.
Instead, aim to preserve your wealth against whatever lies ahead in the market … while also seeking opportunities for growth. To help you do that, I’ve developed a simple investing philosophy that adds multiple layers of protection to any portfolio:
- Keep less money invested in assets going down
- Keep more money invested in assets going up
- Repeat as often as necessary
It’s simple really, just not easy to do over and over again. Call for an appointment to discuss my systems for keeping more of your money in productive investments.
What the Markets Are Doing
Whew! I’m glad that the 4th quarter is over! 2018 was not a good year for investors.
After a red-hot start in January of 2018, the US stock markets, represented by the S&P 500** Index, lost 6.24% for the calendar year.
The bear market of 2018 delivered a 20.04% loss from the closing high on September 20, 2018 before bottoming during the day on December 26th. Smaller US companies, as well as most foreign markets did much worse than the S&P** during the bear market.
Fortunately, 2019 is shaping up to be a better year with US and foreign markets making strong rebounds. Historical stock market patterns suggest this will be a strong year for stocks, too.
Most stock markets still need to break above their 4th quarter peaks to confirm that the bull market is back, and emerging market indexes have already done so.
The US economy continues to be strong as January’s strong job gains show. Economies in Europe and China continued to slow down, so it will be interesting to see if the US can carry the rest of the world economically like it has done for most of the past 100 years. Anyone who has ever bet against the US economy has lost, so I think this one will also work out for us.
Watch the US/China trade negotiations to provide a boost to both markets when an agreement is struck.
Falling interest rates have helped bond prices over the past three months. Lower bond yields mean less competition for stocks, so this is a good thing for both markets.
What We Were Saying Back Then
There is no doubt that Tesla makes some sexy cars, but I have written several times about my doubts about Tesla’s viability as an investment.
This analysis in Investing.com, titled “Is Tesla Still Headed For Bankruptcy?” is clear and concise. It also exposes Tesla’s tactic of juggling the books to get one profitable quarter out of each year, hoping that is enough to keep Wall Street happy.
Here is a link to the article: “Is Tesla Still Headed For Bankruptcy?”
I’m still not touching Tesla stock with a 10-foot pole.
What’s Happening in Your Portfolio
Our Shock Absorber Growth* suite of strategies is back to fully invested after carrying only about 35% of the stock market’s risk through the worst of the recent bear market. Both my Shock Absorber Growth* and Adaptive Growth* suite of strategies have posted returns over 5% for the month of January.
Flexible Income* portfolios are also fully invested with just over 1/3 of the portfolio allocated to high dividend paying stocks which are performing very well.
Gold has finally come to life over the past few months. It had such a blah year last year that our allocations have been cut back to 5% of the portfolios.
- Shock Absorber Growth* is our 100% growth portfolio.
- Flexible Income* is our 100% income portfolio.
- Adaptive Growth Portfolios* are currently allocated with 80% Shock Absorber Growth* and 20% Flexible Income*.
- Adaptive Balance* is 50/50 between growth and income.
Preserving Tax Deductions
Now that 2018 taxes are being prepared, donors who plan to maintain or increase charitable contributions in 2019 are finding that some planning should be involved to keep those tax deductions.
Many donors are surprised that the new tax laws make it difficult to retain expected charitable tax deductions. The increased standard deduction — $12,000 for individuals, $24,000 for those filing jointly — means that itemizing may no longer be the best option since things you once itemized may not add up to exceed the standard deduction thresholds.
For donors over age 70.5, a Qualified Charitable Donation (QCD) from your IRA may be a good solution and effectively increase your tax savings beyond the standard deduction. However rather than waiting until December to do year end giving it is now more important to plan early.
A QCD is a donation that goes directly from the IRA to the charity, bypassing you and bypassing taxation in the process. If a QCD is done early in the year it can qualify as your IRA’s Required Minimum Distribution for the year. However, if the RMD has already been taken, that RMD money may have already triggered a tax liability.
If you are charitably inclined and are interested in this way to best preserve deductibility on donated funds, it is critical that you plan a QCD before your RMD will be paid out. There are only a few ways to get money out of an IRA without taxation, and this is one of them. Please call the office if you are interested in setting up a QCD for 2019.
Mental Floss
There are 14 punctuation marks in English grammar. Can you name at least half of them?
Answer:
Period, comma, colon, semicolon, dash, hyphen, apostrophe, question mark, exclamation point, quotation mark, brackets, parenthesis, braces, and ellipses.
College Classes Coming
Fundamentals of Investing for Retirees
Designed to help investors become more confident about making financial decisions, the easy-to-grasp format of this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include: recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes, and simple risk-reducing strategies that anyone can use. Thursdays, Feb 7th – 21st from 2:00-4:00 p.m. Register online with the link below or call 717-7755 for class #WS19-131, Tuition is $45.
Our Spotlight Strategy – Future Tech
With our Future Technologies Strategy we strive to provide a high rate of capital appreciation using primarily equity investments in emerging technologies.
We invest primarily in stocks, mutual funds or ETFs, and a money market fund. The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines in which case exposure may be quickly reduced or hedged using inverse funds.
Click here to read more about our Future Technologies Strategy.
A Slice of Life…
Never-Ending Education
Back when computers filled whole rooms, I graduated #1 in my class in computer technologies. I had dreams of being a computer scientist until the army snatched me up during Vietnam and sent me to Alaska, so my computer career never really panned out.
However, my natural ability to do things computer-ish has helped me build the business I have today where 95% of my buying decisions are made from my own analysis of market data, not from someone else’s opinion, newsletter or report.
Currently I have five separate analyses (computer algorithms in 21st century lingo) that I run to make buying decisions which give me the close feel I have developed for the stock markets. One is for tech stocks, another for growth stocks in general, two ETF analyses to identify top performing market segments in growth and in income, and another analysis focusing on high dividend stocks. Each of these scans begins with a quantitative analysis – all numbers sifted and sorted in a huge spreadsheet.
The top 10% of stocks out of the spreadsheet analysis get a second level of screening for earnings, sales, debt levels, ownership issues, etc. The handful that rise to the top of this second analysis warrant being studied in charts to determine if the timing of when to buy them is right.
Although this system is producing better and better results with each refinement, it is a lot of work integrating data from several websites, several spreadsheets and a couple of different analysis programs. It is so much work that I am going back to school to find ways of programming many of these functions into a streamlined workflow.
In the book, Siddhartha, Hermann Hesse said “All things return to the river.” And it seems as though I am destined to return to the land of computer programming and systems analysis.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2019 William T. Hepburn. All rights reserved.
