Money Matters Newsletter:
April 5, 2016
Buy and Hold is a Young Person’s Game
The Investment View from Prescott, Arizona
Targeting higher returns to fund retirement logically leads to investing in stocks and stock funds since they outperform other financial assets like bonds, CDs, and annuities by a wide margin over the long
term.
The problem is that older investors don’t have the time to make up losses from bear markets like younger investors do. With time horizons of 20, 30 or 40 years, young investors have time to recover. Older investors don’t have that luxury.
Also, older investors are no longer adding new money to their savings, a big factor in recovering from declines. Instead, retirees usually will need income from their savings at some point, and when money is withdrawn from savings that a bear market decline has already cut in half, as happened in 2008, principal can erode very quickly.
The answer to the problem of needing the stock market’s earning potential and the risk of bear market losses which can exceed 50% is an active strategy which can move your savings out of harm’s way during major market declines – something buy and hold can’t do.
The 4-5% withdrawal rates that are often used to provide retirement income must survive the impact of market declines in a buy and hold portfolio. Bear market declines can devastate the lifestyle of income investors; ask anyone who tried buy and hold during the 2008 bear market. Limit those losses and you can maintain a higher withdrawal rate without running out of money.
A buy and hold investor with $500,000 in October 2007, taking no income from the account, would have recovered his 2007-09 losses in less than 6 years. In that same 6 years, an investor taking $4,000 per month to live on would have only $150,000 left and would be facing the prospect of running out of money in just a few years – unless they stop or drastically reduce their investment income, a move that would certainly impact one’s comfort.
However, an investor who instead knew to move to a money market fund in January 2008 and stayed there until the Summer of 2009 could have made a profit during a time when the stock market lost up to 50% of its value. How can anyone know how to do this? All it takes is a simple momentum indicator such as the crossover of the average price lines for the past 50 and 200 days, an indicator called the “Death Cross” when markets are declining and a “Golden Cross” when they begin rising again.
Here is how the moving average crossover indicator looks on paper:
The Death Cross and Golden Cross may not be the most efficient indicator. There is also no assurance that they will produce gains each time. However, they worked well in 2008-09 when the Death Cross occurred on January 10th, 2008 and a move to a money market fund was indicated until the Golden Cross occurred on August 13th 2009. But, this is only one tool available to an active manager.
Just getting a shiny new box of tools from Sears does not make someone a mechanic. They need to know which tool to pick up and when and how to use it. Likewise, there is more to being an active manager than having a single indicator like the moving average crossover indicator.
The active management systems at Hepburn Capital sell investments that begin to lose money, and move that money into investments going up. This strategy sounds simple, but it takes proven systems to guide its implementation. That is what I do at Hepburn Capital Management. I use systems that Adapt to Changing Markets®.
However, the point of this article is to show that buy and hold investing is a young person’s game. Older investors just don’t have the 20 or 30 years necessary to overcome major market declines, so they clearly need active management to control those risks.
Call the office at 928-778-4000 to look into our strategies that Adapt to Changing Markets®.
Slice of Life
BBQ Alert
I love finding nuggets as I travel, often great restaurants in out-of-the-way places. I don’t often eat barbeque, but when I find a good BBQ place, I dig in.
One of the first restaurants I wrote about in this newsletter, almost 20 years ago, was Bubba’s BBQ, just off Route 66 in Tulsa. Last year it was Porky’s in Paoli, IN. Two weeks ago I discovered a new gem right here, Lucky’s Barbeque in Dewey.
Their ribs may be the best I have ever eaten, the brisket and pulled pork are both most and tender. Even the beans and onion rings deserve an A+.
Check out Lucky’s right across the highway from the Blue Hills Market in Dewey. Parking is in back so don’t be put off by the quiet looks of the place.
What The Markets are Doing
The Stock Markets have staged a strong rally off their mid-February lows. I was surprised by the strength of the rise. However, the stock market is still not yet in a long term uptrend. This can be seen in the attached chart of the S&P 500 Index**, considered representative of the overall stock market.
This is what the stock market has looked like for the year ending March 31, 2016. The blue lines drawn across the market’s peaks and also across the bottoms are both trending down. Although the past 7 weeks do show an uptrend, the larger trend of the market is still down.
Day traders make some money in this market, but longer term investors should remain cautious until the long term uptrend has reestablished itself, and we are not quite there yet.
All in all, the market is looking better than a couple of months ago, although I am not really sure where all the money to push prices up has come from. The European Central Bank is pumping a lot of cash into their economy, but that normally doesn’t correlate to rising stock prices in the US.
Interest rates remain low, and will probably stay that way for a while. Last week, Fed Chair Janet Yellen said the US Central Bank would proceed cautiously when deciding rate policy. Market watchers took her remarks to mean the Fed won’t raise rates in April.
Yellen’s comments centered on global economic turmoil, and the possibility that overseas events could negatively affect the U.S. However, other Fed officials gave conflicting statements about economic recovery.
So which is it? Is the world economy going in the tank meaning higher rates would be a disaster, or are we on the path to recovery and higher rates will stave off inflation?
If you don’t know the answer, don’t worry. Apparently the Fed doesn’t either. Unfortunately, the Fed sets policy for the world that we have to live with.
The markets rose sharply after Yellen’s comments were released, which tells me that the big money thinks that rates will remain low until at least June, if not longer.
What’s Going On In Your Portfolio?
Shock Absorber Growth* portfolios made modest gains for the third straight month in March as the stock market heated back up. As mentioned elsewhere in this newsletter, I am not quite convinced that the market’s decline is finished, so I am remaining defensively positioned with cash and inverse funds providing a hedge. If the market continues to strengthen, I will quickly put the cash to work.
Flexible Income* portfolios also had another good month, with Treasury bonds and energy income stocks leading the way and our two income mutual funds rebounding after a tough 4th quarter.
Municipal Income* portfolios also had a good month and quarter.
All strategies have performed extremely well through March 31, 2016, producing good gains for the month, quarter and even producing gains since the market began to crumble last summer. Clearly my strategies that Adapt to Changing Markets® have served you well during the recent market turmoil. Tell your friends
Free Services for Non-Profits
For 30 years now, Prescott has been very good to me and to Hepburn Capital Management.
One way I express my gratitude and give a little back to our town is by waiving my fee when I manage money for local churches and non-profit organizations. I already do this for several churches and charities, and would be happy to do the same for yours.
If you know of a local board that is not pleased with the earnings rate on their savings, I would be happy to speak with them to see if my risk reducing strategies might provide more satisfactory results. Just call the office to schedule an in-office meeting or to have me address your board. 778-4000
Arizona Bond Funds at Higher Risk
Investor Alert
Arizona residents often buy an Arizona Municipal Bond Fund because it can deliver income exempt from both Arizona and Federal income tax. But did you know that state specific funds get this same break by owing bonds from US Territories, too? A Puerto Rico bond gets the same treatment as an Arizona bond for Arizona investors.
What this means is that most Arizona funds are loaded up with higher yielding Puerto Rico bonds to make them more attractive to investors. The problem is that Puerto Rico’s economy is in shambles and they can’t repay the many billions of dollars in municipal debt they owe. The only thing keeping Puerto Rico from defaulting on their debt is a federal law that prohibits them from filing bankruptcy. However, Congress is about to change that law, meaning bondholders can now get hosed. Get ready for sharp drops in the share price of Arizona muni bond funds owning Puerto Rico bonds.
If you own one of these funds, look carefully at the list of investments in the fund’s Annual Report. If Puerto Rico bonds are listed, your fund may entail much more risk than you thought. I can help you with this research if you don’t know how.
Hepburn Capital offers a municipal income strategy that has protected our clients from these types of problems. Call the office at 928-778-4000 if you would like to discuss having our municipal income strategy in your portfolio.
Scottsdale Office
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 928-778-4000
Tax Tips
10 Most Overlooked Tax Deductions
Among the most commonly overlooked tax deductions are:
1. State sales tax
2. Student loan interest paid by parents
3. Job hunting expenses
4. Moving expenses to take your first job
5. Deduction of Medicare premiums for the self-employed
6. Child care credit
7. State tax paid last year
8. Refinancing points
9. American Opportunity Credit for qualified college expenses
10. Lifetime Learning credit used to gain better job skills
If you think one or more of these deductions may help you, call your tax preparer to go over the details.
Our Spotlight Strategy
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 Future Technologies.
If you would like a current copy of our Privacy Policy or our SEC Form ADV, Part 2, you can find them at our website at www.hepburncapital.com/images/PrivacyPolicy.pdf or www.hepburncapital.com/PR/form-adv.pdf respectively.
* 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.
Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth
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) 2015 William T. Hepburn. All rights reserved.
