3 Benefits Of The Next Bear Market

I was out at dinner over the weekend with a group of friends and the topic of financial markets came up. “Are your clients really worried about the share market?”, I was asked. “Not really”, I responded. My response was foreign to her. She was shocked that the stock market’s decline of about 8% over the last couple of weeks hadn’t shaken our clients. “What do you mean, not really? We haven’t seen a decline like this for a long time, the stock market is at it’s peak, the US are raising interest rates, Trump is ruining global trade, and China is slowing down”.

I believe that over the long-term markets are driven by fundamentals, and over the short-term, sentiment. The recent events have investors asking how much further will the market fall, and whether this is the start of a bear market.

Here’s what the recent market decline looks like since (chart since June this year):

Source: Yahoo Finance

And here’s a longer-term perspective. I’ve highlighted the most recent decline as well as similar declines we’ve seen over the last few years:

Source: Yahoo Finance

It’s been 10 years since the GFC, and the stock market has gone bonkers since. In fact, it’s the second longest bull market in history, with a gain of almost 325% (S&P500). Let’s all now look forward to the next bear market and it’s benefits.

1. The Greatest Gift

It’s one of the greatest financial gifts that may be offered to you, but only if you accept it. What do I mean by that? It is only rewarding if you do something about it, that is, if you continue to invest – because you’re buying assets at a lower price. It gives you the opportunity to leapfrog your wealth in such a short-period of time.

This is what a Black Friday sale looks like in the US. For those of you who don’t know, Black Friday is basically the first day of the Christmas shopping season, and everything is ridiculously cheap.

Here’s what folk do when the stock market is ridiculously cheap.

Bizarre right?

2. Your Risk Tolerance

Fred Schwed wrote the celebrated 1940 book about Wall Street, “Where Are the Customers’ Yachts?” In it, he offers this memorable passage: “Like all of life’s rich emotional experiences, the full flavor of losing important money cannot be conveyed by literature. You cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin by words or pictures.”

There’s no way to know ahead of time, how we’ll feel and act during the most turbulent of times. While things are going well investors will typically allocate more money to this asset class – it’s the classic buy high, sell low strategy. The most important decision investors can make is how much they will allocate to different asset classes – their asset allocation, which dictates 90% of your return with stock selection and market timing making up the rest.

Harry Markowitz, Nobel Laureate and father of modern portfolio theory, when he was asked by Jason Zweig how he allocates his personal portfolio, his response was hilarious:

Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Living through a bear market is really the true way of discovering what mix between stocks and bonds we’re most comfortable with.

Ben Carlson summed it up perfectly in a recent tweet:


3. A Necessary Detox

Bear markets are a necessary detox to the foolishness of euphoria. They’re a neat way of weeding out the not so long-term investors – an ugly way to do, but one that is necessary.

Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.

– Sir John Templeton

Although it’ll dent your portfolio in the short-run, it’s much better for you long-term.

Morgan Housel’s tweet was a knock out:

With the right mix of assets, a bit of cash under the mattress, investments that have specific objectives, and someone to guide you along the way, you too wouldn’t be worried about the next bear market.

Source: Ben Carlson – A Wealth of Focus, Market Watch, Yahoo Finance, Giphy, Investopedia, NY Times

Why The Experts Didn’t Tell You About The Stock Market Correction Before The Fact

A little over a week ago, we took a family trip up to the Gold Coast – Surfers Paradise to be exact. We were supposed to have a week of sun, beach, and fun. Leading up to our trip, we would constantly be checking the weather (as you do). The closer we got to our trip, the worse the weather forecast – 90% chance of rain, thunder, and humidity, for 6 of the 7 days. Queensland’s Gold Coast has around 300 days of sunshine per year, that’s a 82% chance of a sunny day. Unfortunately for us, we got caught up in the 18% of no sunshine. In fact, torrential rain and wind.

As you probably know, I love my charts and tables, so here is the rainfall report for the month of October (in millimeters). I have highlighted the days we spent in Surfers:

Source: www.weatherzone.com.au

Yuck – enough said.

The stock market is offering similar odds – a 75% chance of a positive return in any given year, and a 25% chance of a negative return in any given year (it has done so over the last 100 years).

During our time away, the stock market went a little crazy (as you probably saw and heard), down 3.30% in one day, and 5.27% over two days. Here’s the chart:

Source: Yahoo Finance

The sell off on the 10th of October was in fact just the 98th one-day drop of 3% or more for the US stock market since 1952, and the 20th time we’ve seen a one-day drop of 3%+ since 2009 (that’s about 2 per year for the last 10 years). Here’s a fun fact for you, it was just the 14th time it has happened on a Wednesday – here’s the chart:

Source: BIG

Other than the beginning of 2018, we haven’t seen this much turbulence in the stock market for some time now (see VIX below), in fact since June 2016 – no wonder investors were nervous. We’ve had such a relatively stable and non-volatile stock market during this time, that investors have become accustom to something that is not normal.

Source: Yahoo Finance

Since the sell off of last week, no doubt you have read and heard all the “after the fact” explanations in great detail – what happened and why, with utter certainty.

What led to the stock market sell off was so obvious – how could you not have seen it coming? And we didn’t want to spoil the fun by providing an explanation before the sell off either.

It was the Fed’s monetary policy and raising of interest rates? Or maybe it was elevated stock valuations? Oh wait, it was probably President Trump and his many “wild” policies. No, no, it was a strong US dollar, or the risks inherent in emerging markets, surely? But didn’t we know of, and aren’t we all aware of these risks, and have been for some time now? How did they startle markets overnight?

Human beings seek certainty. We seek predictability, rationalisation, and for things to unfold in an orderly fashion. Unfortunately, as we all know, life does not work this way, let alone the stock market I’m afraid to say. Yet each and every day, we turn to the so called experts and gurus to enlighten us with what just happened and why.

So what can investors do?

Accepting the facts is a great place to start. And for most of us, the facts are:

  1. To invest means we must take on some level of risk.
  2. The amount of risk we decide to take will likely influence our return.
  3. Risk means not knowing. Not knowing what tomorrow brings. Not knowing when the market will collapse. Not knowing when the market will recover. Not knowing when we’ll encounter our next recession.

In the 1927 book “Security Speculation – The Dazzling Adventure,” Laurence H. Sloan repeated the now famous anecdote about J.P. Morgan’s view of the stock market:

History has it that a young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.”

No one really knows what the market will do from here. Whatever it does, we cannot control. What we can control is how much we are prepared to expose ourselves to the game – the game we cannot control. We can control costs and expenses, and we can control our behaviour and discipline. This has been proven again and again in the data.

You can sit there and lend an ear to the gurus who provide you the ‘after the fact’ rationale you so desperately seek. People sound and look smarter by providing it to you too – I truly wonder where they were the day before. If it was so obvious, why didn’t we see it coming?

The reality is simply this: Markets are random. The stock market is driven by fundamentals over the long-term, and sentiment over the short-term.

Once you make a decision to invest, whether it be a trip to the Gold Coast, or in the stock market, you’re also making a decision to accept the risks – the weather on your trip, and the ups and downs of the stock market. Cancelling your trip because of the poor weather, or withdrawing your funds because the market fell 10% is a sure way to lose money.

This bull market has been running hot for 10 years now, and investors seem to have gotten cozy in their seats. We all know bull markets don’t last forever, and if the events of last week made you a little nervous, you probably should revisit what you’re doing and why.

Invest your portfolio today as if the market will collapse during your sleep. Because one night it will, and what you do next will either leapfrog or destroy your financial wealth.

31 Reasons Why You Need A Financial Adviser

Someone once asked me that if I was any good as a financial adviser, why was I working as one and not simply making my money by managing my own investments? I thought to myself, that’s an interesting yet naive question.

So I decided to list 31 things good financial advisers will do for their clients, and why you need one. Here it goes:

  1. Takes as much time as necessary to genuinely understand where you are now, where you want to go, what help you need/want, and most most importantly, why.
  2. Helps define your goals, aspirations, desires, and fears.
  3. Understands what ‘truly wealthy’ means to you (because money is simply a means to an end).
  4. Thoroughly reviews your current position, then studies and analyses multiple scenarios/strategies to help enhance your current and future position.
  5. Will create an initial plan, which is simply a starting point, and make adjustments along the way to help support your goals.
  6. Helps makes wise choices about cash flow, management of debt, education funding, tax efficiency, personal insurance, estate planning, and investments.
  7. Puts in place strategy and structure to help achieve your future goals.
  8. Will explore all asset classes to help achieve your goals.
  9. Not only manages investments, but also manages investors.
  10. Helps you decide how, where, and when to invest.
  11. Helps match your balance sheet to your life.
  12. Will measure your performance not to an index, rather, to your personal goals.
  13. Helps you make better decisions with your money in the face of uncertainty and fear.
  14. Arms you with information to help you make better decisions.
  15. Helps reduce the uncertainty and anxiety that comes from making important financial decisions with your money.
  16. Stays on top of economic, market, and legislative changes so you don’t have to.
  17. Proactively keeps in touch with you.
  18. Liaises with your other professionals, and co-ordinates your banking, personal insurance, and estate planning with specialists.
  19. Gives you back time so that you can spend it on more important things in your life.
  20. Advises on the optimal mix of investments for you so that you can maximise your rate of return for a given level of risk.
  21. Monitors and oversees your investments.
  22. Maintains financial records on your behalf, such as tax reports, cost basis information, wills, and legal documents (basically your financial life).
  23. Acts as your sounding board.
  24. Is the ‘middleman’ between you and stupid.
  25. Provides as unemotional and unbiased point of view.
  26. Has your back.
  27. Is honest with you – they’ll tell you what you need to hear, not what you want to hear.
  28. Introduces you to the right people.
  29. Helps consolidate and streamline your affairs.
  30. Shares experiences of many other clients who have faced or are facing circumstances similar to yours.
  31. Get’s shit done (because you probably won’t).

It’s always simpler to do nothing. Chasing something you want is hard work – I guess that’s why not everyone gets what they want in the end. Personal finances are easy, right? Wrong. On our own, most of us lack clarity and objectivity, we get stuck in our own heads, we make emotional and careless decisions. We’re most likely busy doing other things in our lives, and we don’t have the information, resources, or time to sit down and dedicate thought, energy, and focus that personal finances take to make great decisions over the long-term.

Engaging an experienced and professional adviser to help you create your own personal financial blue print and game plan will help you understand your current position – your status quo, and more importantly what you need to do to get to where you want to go.

Asking others who are strong in areas where you are weak to help you is a great skill that you should develop no matter what, as it will help you develop guardrails that will prevent you from doing what you shouldn’t be doing.

– Ray Dalio

I’m curious. If money is the vehicle, what’s the destination?

The 6 Biggest Mistakes You Will Make as an Investor

Most of us want to achieve success, whether that may be at work, in our relationships, or our health. In the pursuit of success, we all experience moments of self-loathing and frustration that stems from nowhere other than from our own hands – we are, our own worst enemies. Success in personal finance is no exception.

Have you ever wondered, what is the biggest risk to achieving your financial goals? Is it geopolitics, inflation, the rise of crypto-currency, a property bubble? No. It’s your own mind.

You can invest is all the right things, minimise all your fees and taxes, and diversify most risks away, but if you fail to master your own psychology, it is still possible to fall victim of financial self-sabotage.

Our brain’s natural instincts, to avoid pain and seek pleasure, may be very useful to Fred Flintstone, but can be very harmful when making financial decisions. So how do investors overcome these biases? The concept is simple, yet will test even the most seasoned of investors.

Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas. – Charlie Munger

Put in place a system, rules, and a set of procedures that will protect you from yourself.

Mistake #1 – Seeking confirmation of your own beliefs

Our brains are wired to seek and believe information that validates our own existing beliefs. We love proving to ourselves how smart and right we are.

The solution

Ask questions and actively seek the opinions of well respected people that disagree with your own.

The power of thoughtful disagreement is a great thing – Ray Dalio

Mistake #2 – Extrapolating recent events

One of the most common and most dangerous, recency bias – to believe the current market trend will continue into the future. Investors end up buying more of something that has recently increased in price, ultimately paying more for the investment.

The solution

The best way to avoid this impulse of buying high (aka FOMO), rebalance your portfolio. You effectively sell assets at higher prices and buying assets at lower prices – when one investment performs well, you sell some of it, and top up the investment that hasn’t done so well.

Mistake #3 – Overconfidence

Ask a room full of people to raise their hands if they are a better than average driver, and you’ll have 93% of the room raise their hand. As human beings we overestimate our own knowledge and abilities, which can lead to disastrous financial outcomes.

The solution

By admitting you don’t have an edge, you’ll end up with an edge..

If you can’t predict the future, the most important thing is to admit it. It its true that you can’t make forecasts and yet you try anyway, then that’s really suicide. – Howard Marks

Mistake #4 – Swinging for the fences

As tempting as it is to go for the big winners to fast track your financial wealth, the more likely you are to be bowled out, which also means it’s going to take you even longer to get back on track.

The solution

The best way to win the game of investing, is to achieve sustainable long-term returns that compound over time. Short-term noise is simply a distraction from Wall Street.

The stock market is a device for transferring money from the impatient to to the patient. – Warren Buffett

Mistake #5 – Home bias

We have a tendency to invest in markets we are most familiar with creating a ‘home bias’. For example, we invest in the stock market of the country we live in, we invest in the stock of our employer, or we invest in the industry we work in. This bias leaves us overweight in “what we know”, which can destroy our hard earned wealth in some circumstances.

The solution

Diversify across asset classes, regions, and industries. From January 2010 to October 2018, Australian shares returned 7.50% pa. International shares returned 12% pa, and US shares returned 16% pa.

Mistake #6 – Negativity

Our brains are wired to bombard us with memories of negative experiences. The amygdala – the fight of flight system in our brain, floods our bodies with fear signals when we are losing money. Think GFC – markets were plunging, investors panicked, selling down their investments to cash. The US market has tripled n value since the GFC, making up all the losses plus more.

The solution

1) Be clear on why you made a certain investment.

2) Invest today for the long-term but assume the market will collapse tomorrow.

3) Partner with the right financial adviser to act as your sounding board.

By failing to prepare, you prepare for fail. – Benjamin Franklin

These aren’t guarantees that you will be successful during your investing journey, but it will damn sure put the odds in your favor.

Godspeed.

Source: Visual Capitalist, Wikipedia, Vanguard

When Life Throws You Lemons, Make Lemonade

Like most Collingwood supporters, I too thought we were going to walk away from the MCG on Saturday afternoon with the silverware. Collingwood lead the Eagles for 104 minutes of the game, and the Eagles lead the Pies for just 8 minutes of the entire game. Alas, it wasn’t meant to be, with the Eagles ahead when it mattered.

Whether it’s football, our finances, our personal goals, or our own lives, perspective and context can help you not only understand where you stand, but also help us become far more appreciative and grateful for what we have.

Here are 8 facts that may help us appreciate the world we live in today:

  • In 1950, the number of people in extreme poverty was 75%. Today, that number sits less than 10%.
  • Child labor has been reduced by more than 50% only in the last 16 years.
  • Close to 20% of males born in the US died before their first birthday in the year 1900. Today the mortality rate doesn’t reach that high until you reach age 62.
  • What used to be reserved for the world’s elite, world literacy has increased from 35% in 1950 to more than 80% of people today.
  • Progress in health is equally as astonishing. In 1800, more than 40% of the world’s newborns would die before the age of 5. Today, that number sits at less than 5%.
  • The share of homes that had electricity in 1870 was exactly zero. Today the proportion of people with electricity is 85%.
  • Between 1950 and 2009, the rate of death in traffic accidents fell six-fold.

Here are 5 facts that may help you put the current financial market into perspective:

  • The stock market has been up 3 out of every 4 years.
  • Less than 5% of the time has the market finished a year worse than being down 20%.
  • 2008 type scenarios are extremely rare. Only 3 times since 1825 did the market finish a calendar year down 30% or worse. That’s about once every 63 years.
  • Over the last 30 years, the stock market has declined 46% and 48% over an 18 month period, yet during this same time has grown by 8% pa (including dividend and adjusted for inflation) – which is around 1,892%.
  • The current bull run is the second longest in history.

Here are 7 facts that should help put the Pies’ performance into perspective:

  • In 2017 Collingwood finished 13th on the ladder.
  • In 2017 the nation was calling for Nathan Buckley’s head.
  • In 2018 Collingwood had one of the longest ‘big name’ injury list in history.
  • In 2018 Collingwood defied all odds.
  • In 2018 Collingwood finished 3rd on the ladder.
  • In 2018 Collingwood annihilated the reigning premiers in a preliminary final.
  • In 2018 Collingwood made the grand final – they lost by 5 points.

For a club that was in the doldrums just 12 months ago, to have come this far in such a short space of time, should be commended for their hunger, discipline, focus, and drive – a remarkable performance and achievement.

As human beings we seem to make the rules for success very difficult, yet the rules for failure are super easy. Think about it for a second. What needs to happen for you to be happy in life? A whole damn lot I would guess. And what needs to happen for you to be sad or angry? All you probably need to do is stub your toe on the corner of your bed! – Am I wrong?

Without context and perspective, human beings find appreciation and gratitude difficult. The lives we live today are likely to be better than the lives our parent’s lived. The lives of our children are likely to be better than our’s. We always have the rest of today, and tomorrow to better ourselves – the choice is ours.

What we focus on is what we become. How we look at things is what we see. Our perception is our reality. Great things take time. As they say, Rome wasn’t built in a day. For my dear-loved Pies, we’ve built a great young list, a unified team, and a culture of ‘never say die’. I look forward to the joys of 2019.

I guess things could be worse, right? I mean, you could be an Essendon or Carlton supporter.