Worried about the stock market?

Friday the 4th of November marked the longest stretch of declines (9 straight sessions) in the US stock market since 1980. Scary right? Sure. What followed was a steady stream of gloomy predictions by market “experts”. Not surprisingly however, here’s what happened subsequently:

Source: Thomson Reuters Eikon

The market climbed 5% within days. Now that would have been poor timing.

You used to be able to make forecasts and predictions and get away with it. People wouldn’t remember them all. You’d then only market the ones you got right. Absolute genius.

Today however, it’s a different story. People don’t need to have a good memory. Google does that for us. The more investors I speak to, the more it’s becoming evident to me that people are learning to ignore these charlatans.

I mean, the latest US presidential election was a prime example. I’m not going to go into detail as we all know what happened. What I will share with you however, is how quickly headlines change.

Here’s what Citigroup had to say pre election:

stock market

Here’s how quickly they changed their minds:

stock market

The immediate reaction of financial markets forced these experts to change their tune. Price changes sentiment, and it does so very quickly. This was not only a Citigroup thing, it was all the so called experts.

Can you imagine the destruction of wealth that would occur as a result of taking this free advice? You pay for what you get right?

As difficult as it may seem, it’s important to take the long view. What we’re seeing today, and what we’ve seen in the past is a mere blip over the long-term.

Kieron Nutbrown, former head of global macro fixed income at First State Investments in London, put together what I think is a brilliant piece of work and just the reminder to help investors take a few steps back and take a look at markets through a much wider lens.

His chart follows the path of global stocks over the past 500 years and demonstrates how prices have fared through wars, revolutions and depressions.

stock market

Click here for gigantic version

The chart provides a great visualization of the ups and downs of market sentiment. The greed, the fear, and the actions that follow. What does this chart tell us about the future? Not much. But I’m sure you’ll have experts who’s job it is to make daily predictions construct a compelling story. What it tells me is that the stock market has handsomely rewarded long-term investors.

Despite all the evidence pointing to peoples inability to accurately and consistently predict the future, we’ll continue to see what was traditional practice continue.

There is nothing wrong with admitting you don’t know what the future holds. But this should not and will not stop you from making good decisions.

For those that are wondering what’s up with the featured image of this post, let me explain. The image and detail was borrowed from Index Fund Advisers, a US based wealth management company. The scene depicts a street in Amsterdam that had erupted into a trading frenzy. At the Quinquenpoix coffee shop, overflow trading became the norm because the exchange had become too crowded with traders manically trading to gain quick wealth. At the scene’s center, a cart is being pulled by characterizations of the bubble stocks of the time, including companies like the South Sea Company, the Dutch East Indies Company, and the West Indies Company, a banking company and an insurance company. Driving the cart is Lady Insanity, while the Goddess Fortuna floats above, dropping stock certificates littered with snakes, while the devil blows bubbles in the air. Meanwhile, Lady Fame slowly, but assuredly, leads the cart to one of three destinations: the hospital, the mad house, or the poor house.

Next time your faced with making an investment decision, you can take the advice of Paul the Psychic Octopus, or you can look to evidence and logic to guide you. The choice is yours.

My portfolio post Trump

There it is folks. It happened. Then, the sun rose this morning. Although some did expect it to, the world did not end.

In yesterday’s note I said this would be a buying opportunity if you had cash and time on your side. Alas, you won’t get the chance to follow through with this strategy. See chart below.


Source: liveindex

Michael Batnick from Ritholtz Wealth Management wrote a great post this morning, where he summed up the situation better than anyone could put it. Here’s his common sense view point:

When I woke up losses had been pared to -2% and when stocks opened at 9:30, they were positive within minutes. If stocks had opened down 5%, it would have just been the 76th time that’s happened over the last 88 years. Although the S&P 500 would have been just 7% off its all-time highs, you never look a gift horse in the mouth, which is what I said when I bought more European stocks directly after the Brexit.

To be clear this was not a market call. I don’t have an investment “thesis.” I don’t do macro. I have no idea how all of this shakes out. I don’t know which direction interest rates will go or what effect they’ll have on stocks. I don’t know where inflation will be next year or what it might do to the dollar. I don’t know how a Republican President with a majority in Congress will effect certain laws that might change the way some businesses operate in America. But I am 100% certain of a few things:

  1. I cannot time the market.
  2. Over time, stocks pay you for taking risk.
  3. Less is more, you’re not awarded any extra points for complexity.
  4. Barring an early termination, I have decades of investing in front of me.

There’s another thing here that’s extremely important to me, our clients. If stocks did open down 5% or more, I wanted to be able to say to our advisors and our clients that I was a buyer of stocks. Not that I thought this was the “optimal” time to buy, or that there wouldn’t be more pain ahead, but rather to demonstrate that I practice what I preach, that I eat my own cooking. It’s easy to talk passionately about something when you believe it with every fiber of your being.

People might call me smug, young, or naive. And while it’s true that I never saw my portfolio fall by 50%, to those people I would ask, does experiencing one bear market make the next any easier? I speak to a lot of investors and I’ve never seen someone say “Oh yea, the dotcom bubble sucked and I made some really bad decisions, but then when the financial crisis came, despite millions of Americans and a lot of my friends and family losing their jobs, I just tuned out the noise.”

Please, don’t kid yourself. It never gets easier.

So does this mean that I just buy the S&P 500 and forget about it? That’s certainly not a terrible option and would put me ahead of most investors over the long term, but I diversify across the globe and across strategies. I don’t feel the need to outsmart the market and I’ve never been more convinced  that nobody knows nothing. How could you look at the market today and come to any other conclusion? So that’s what I do with my portfolio. It’s what works best for me. I hope you find what works for you.

The S&P 500 is now 6% off its overnight lows and pretty close to new all-time highs. So I didn’t get the chance to buy, oh well. Maybe next time.

Now that the US election is out of the way, the horizon is all clear right? Well, I’ve got some bad news for you…

Source: Zero Hedge

Risky assets will never give you a free kick. You need to concede there are always risks present. There is always an event that could “shake the world”. You need to look beyond the headlines, look at the facts, and make investment decisions that support your personal goals. Look at history and you’ll be rewarded, handsomely. If you can’t do this, risky assets are not the place for you.

At the time of closing this note, the Aussie share market is up over 3% this morning after falling over 2% yesterday.


Source: Thomson Reuters Eikon

There could not have been a worse time to sell.

3 myths the financial industry does’t want you to know

Weather you’re a professional investor or seek the guidance of one, the world of investing and advice can be a foggy and dangerous place. It’s what you don’t know that hurts you the most.

The financial industry is riddled with myths, and if you’re not aware of them, they will slowly eat away and destroy your financial future like termites at a piece of wood.

Here are three myths that the financial industry doesn’t want you to know, because otherwise, quite frankly, it’ll put them out of a job.

Myth 1: Invest with us – we beat the market

A blindfolded money throwing darts at the stock listings could select a portfolio that would do just as well as one selected by the experts. – Burton Malkiel, economics professor at Princeton University

Studies have shown the most accurate investors in the world are correct 68% of the time. Unfortunately, these investors fall short of the 74% required to beat the market. In fact, 70% of Australian share fund managers, 90% of international share fund, bond, and property managers, under perform the index. The odds are certainly not in your favour. There seems to be some value in the Australian small companies sector.


Source: SPIVA

Even Warren Buffet, one of the world’s most successful investors, discloses the advice he has given to the trustees of his estate in his 2013 letter to shareholders:

My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
If you don’t believe you or your wealth adviser can make better investment decisions than Warren Buffet, then you too should take his advice.

Myth 2: Our fees are a small price to pay

Over the years, I don’t think I’ve ever met an investor or prospective client who understood the true cost of their investments. Management fees, expenses fees, performance fees, buy/sell spreads, brokerage, etc. You get my drift. It’s supposed to be confusing. Otherwise, investors would realise how much these investments actually cost.

On face value, they may not seem to be a big deal. Over time however, they add up. Compounding along with your investment returns.

Let’s say you have $100,000 to invest. Let’s say your investment portfolio earned 6% each year for the next 25 years. If your fund had no fees, you’d end up with about $430,000. On the other hand, if you paid 2% each year in fees, after 25 years, you’d only have about $260,000. That “small” fee wiped off 40% of your final investment balance. It doesn’t sound that small anymore, does it?

A bar chart showing that 2% costs can eat away at money you've saved

Source: Vanguard

Research suggests that lower cost investments outperform higher cost alternatives by around 10% pa. Would’t you rather the difference in your pocket?

Myth 3: I’m your adviser and I’m here to help you

You’ve found the person with whom you’ve trusted to plan and help manage your family’s wealth and they’ve every incentive to act in your best interest. Excellent.

The financial planning and wealth management industry has many caring people of the highest integrity who genuinely want to do the right thing by and act in their clients’ best interests. The truth is that these same advisers and wealth managers are either owned or controlled by the big four banks and AMP. In fact over 80% of them.

Unfortunately, these advisers are operating in an environment where processes and tools at their disposal are designed to be in the best interest of the above (and their shareholders). The system and their remuneration is unfortunately not designed to provide you with conflict-free advice, but designed to incentivise and reward them for selling.

Although the Future of Financial Advice (FOFA) reforms were introduced as a government response on improving the quality of financial advice in Australia, we’ve got a long way to go.

In order to receive truly conflict-free advice, investors must align themselves with an objective, unconflicted firm. A firm without any allegiances or obligations.

To quote one of the most successful institutional investors of our time, David Swensen who runs Yale University’s US$25.4 billion endowment,

To have unconventional success, you can’t be guided by conventional wisdom.