Being Smart with $$ -- Jack Bogle has Died, the Man Who Helped Investors Lower Fees

Vanguard founder Jack Bogle has died. 

“A lot of Wall Street is really devoted to charging a lot for nothing and Bogle charged nothing to accomplish a huge amount.” (Warren Buffet speaking to Becky Quick at CNBC.)  Jack Bogle “introduced the first index mutual fund for individual investors” and “drove down costs across the mutual fund industry.” (Vanguard.com 1/16/19.)  “Fees matter more than most people think and Jack Bogle gave individual investors a way to lower their fees.  The less an investor gives away in fees, the more their own money is working for them.” (Larry Pike, now.)

https://investornews.vanguard/a-look-back-at-the-life-of-vanguards-founder/

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com

Being Smart with $$ -- Isn't the Stock Market Risky Enough?

2018 reminds us that some years you make money in stocks but some years you lose it.  In either case, you want to make as much as you can and not lose more than necessary.  Many think that buying the star mutual fund of the last few years gives you a better a chance of making money in up years and losing less in down years.  But often the opposite is true.  When you buy a market-tracking index fund instead of an actively-managed fund, you are sure to almost match market returns every year. When you buy an actively-managed fund, you don’t know what you’ll get.  Maybe you want exposure to Europe and are choosing between Vanguard’s European Stock Index Fund and Janus Henderson’s European Focus Fund.  Three years ago, you may have noticed Janus’s strong performance over the prior 3 years versus the Vanguard fund and paid their 5.75% sales commission to buy this fund. But unfortunately you would have paid the price for learning that past performance often doesn’t carry into the future.  The Janus fund went on to severely underperform the unmanaged, market-tracking Vanguard index fund over the next 3 years.  In fact, the performance was so bad that even including the great years the Janus fund had from 2013 to 2015, the total 6-year performance of the Janus fund was far worse than the Vanguard index fund.  This doesn’t even include the commission paid to buy it.  What is the lesson?  Chasing strong past performers is often a losing strategy and buying low-cost, market-tracking index funds lets you match a market benchmark and in the long run that can work out quite well. Isn’t the stock market risky enough without the added risk that your fund might trail the market itself?

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com 

Being Smart with $$ - Letter to Clients and Friends: Fundamental reasons to be a stock-market investor despite the chaosBeing Smart with

Dear Clients and Friends:

It has been a tough year to be a stock market investor.  Therefore, I believe it is a good time to discuss the mechanics of the stock market and why the majority of experts believe that stocks are appropriate for most portfolios.  Forgive me if I make this too simplistic but a reminder of how we benefit from being an investor in stocks may be useful for everyone.

First, a quick reminder of stock market performance over periods we consider to be the worst of times.  I will reference the Dow Jones Industrial Average as the benchmark that the news channels seem to favor:

The Dow peaked in 2007 at 14,165.

It hit a low of 6,443 in 2009.

Today it is at approximately 22,400, almost 50% above its peak from before the crash 10 years ago despite being down almost 20% from its recent peak in October of this year.

 In 1987, the Dow reached 2,722.

On Black Monday October 19, 1987 it fell to 1739. 

Ten years later the Dow closed the year 1997 at 7,908, almost 3 times higher than the pre-crash peak. 

As a reminder, today the Dow is near 22,400. 

It should be noted that on top of price gains, some stockholders also received dividends each year. 

Now for stock market fundamentals:

When you buy stocks, you are an owner of the company.  As an owner, you share in the profits or losses of that company.  Profits are sometimes paid out in annual dividends so that even in the absence of a change in the stock price, you still might have a positive return.

America’s companies are quite profitable on average. Fortune.com reports that Fortune 500 companies as a group generated around $1 TRILLION in profits last year.  If the same occurs over the next 10 years, that might be $10 TRILLION in new value created that benefits the shareholders in these companies. Profits could be worse so you may prefer to assume they’ll generate $5-7 TRILLION.  When we hear that earnings will be poor in the future, don’t take that to mean corporate America will lose money.  It usually means that earnings might just be lower even though they will still be substantial. Even in 2008, an historically horrible year for the economy, Fortune 500 companies made a small profit.  And even though one year was quite bad, the years before and after saw far higher profits for these companies.

Stock prices can swing wildly for a variety of rational and irrational reasons.  But what happens over the next 10 years when $5-10 trillion of new profits are generated by these 500 companies which were recently worth approximately $21.6 trillion in market capitalization.  It might be reasonable to believe that the owners of these companies, the stockholders, will enjoy nice returns on their investments.

Is there a guarantee that stock prices will rise? Never.

Should you be invested in stocks if you need the money in the next few years?  Probably not since it can take a long cycle for the price of a stock to reflect the fundamental value of a company.

Should you be diversified? Certainly yes because while corporate America as a group is profitable, there will always be a few companies that don’t survive.  Add international exposure for even better diversification.

Are stocks right for everyone?  They are right for you for a portion of your portfolio if you have a long-term time horizon.  If you are retiring tomorrow, you will likely be drawing from your portfolio over the next 30 years and may benefit by having some of your money in the stock market.  If you are in your 80s and don’t expect ever to need a chunk of your money, you may want long-term growth for assets that will go to your kids.  Every investor’s needs are different and the appropriate allocation to stocks will vary for everyone.

Will you panic and bail out in tough times? If yes, stocks are probably not right for you as patience is how stock investors usually succeed.

Can you time the market and know when to get out and when to get in?  Research suggests that more people fail at this strategy than succeed.

I repeat that there are no guarantees in investing and past results may not be an indicator as to what to expect in the future. But consider this:  if you are able to earn an extra 2% on your investments, you might collect nearly double the money over 20 years. Avoiding assets that are volatile in the short term but usually offer higher long-term returns may be assuring yourself returns that don’t let you achieve your long-term goals.

As always, I am happy to discuss your individual circumstances in greater detail.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com

Being smart with $$ - Stock Crash Consolation Prize #2

Stock Crash Consolation Prize #2:  Cheaper Roth Conversions.

Converting a Traditional IRA to a Roth IRA means paying taxes now on your retirement account assets instead of paying taxes when you take the money out in retirement.  But once the money is in the Roth IRA account, it will grow tax free moving forward with all the money available to you in your golden years.  While a Roth conversion may or may not be right for you, it is cheaper to convert when the market is down.  Let’s say you have 100 shares of Apple in your Traditional IRA and were thinking about converting those shares in September.  If you did so, you would have to pay taxes based on the value of Apple at the time which was around $22,000.  But if you procrastinated and still want to convert the shares, now you can do so with the value of your Apple stock around $15,000 and only pay taxes on this much lower value.  Same shares converted, less taxes paid.  Stock crash: bad.  Cheaper Roth conversions: good.  There’s rules and nuances you should know before converting but at least you have another consolation prize from this stock market chaos.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com 

Being smart with $$ -- Stock Crash Consolation Prize

Stock crash consolation prize:  Tax losses. 

Sell your losers to offset capital gains distributions from mutual funds and gains from winners you’ve sold this year. You can even use losses to offset up to $3,000 of regular income. You don’t even have to leave the market since you can sell one item and simultaneously buy a similar but not identical item. Just make sure not to buy back the loser within 30 days or else you won’t get to use the loss. Do you have a large-cap, actively-managed fund at a loss? Sell it and on the same same day buy a large-cap index fund. Voila. You’ll get the benefit of the loss and still have almost the same exposure to the market. (This does not work in retirement accounts.) Who said a market crash is all bad? 

Larry Pike, CFA

www.clientpriority.com

Being Smart with $$ -- Stocks are Down. Now What?

Stocks are down.  Now what?  First of all, to put in perspective, the US market is really only down about 5% for the year (including dividends.)  It’s easy to feel whiplash when the market is so volatile but if you had the TV off for 2018, you’d look today and be annoyed that you lost 5% though you wouldn’t think of this as the 1920s all over again.  And if you look at the average return over the last 5 years, you’ve realized better than 8% annual returns.  But the question is: what’s next?  We can’t go back to early October and sell at the artificial highs.  So do you sell now when the market is at a much cheaper level than October 1?  And while cheaper, is it cheap?  Nobody knows the answers to these questions but many have opinions.  It seems that a few months ago when the market was high every analyst predicted the market would scream higher.  Now the market has fallen and every analyst seems to predict more declines.  So often these opinions are late to the party.  Every investment decision must start from today and yesterday’s results don’t matter.  Historically speaking, most families that have achieved long term financial success did so by tuning out the drama on the business channels and holding steady through volatile times.  Those that timed the market, more often lost the bet than won it.  Don’t keep more in the stock market than is appropriate for your profile.  But sit tight and remember your stock portfolio is supposed to provide for your needs in 2030 or 2040, and not in 2018.

Larry Pike, CFA

Client Priority Financial Advisors LLC
www.clientpriority.com 

Being Smart with $$ - Bad Behavior by a Financial Adviser May Be Hard to Spot

I just read an article about a client suing their financial adviser because they lost money on what was supposed to be a conservative investment.  It’s easy to spot bad behavior when you lose money.  But MOST bad behavior is less obvious.  When you make money, you are happy.  But would you be happy if you found out you should have made TWICE as much and the difference went to your financial adviser?  You probably know 10 people this has happened to.  It’s simple.  The earnings on money invested over 20 years at 5% net of fees will be DOUBLE of what that same money would earn if the annual fees were 2% higher.  Maybe you are even paying a big, upfront commission AND high annual fees.  This is far more common than you think.  Be careful of the sales pitch from that adviser who seems like such a nice man or woman.  If you don’t understand what you’re being sold, you are probably one of the 10 people mentioned above.

Client Priority Financial Advisors LLC is an independent, fee-only, hourly-advice company. 

NO COMMISSIONS. NO AUTOMATIC RECURRING FEES.  WE CHOOSE INVESTMENTS WITH ULTRA-LOW EXPENSE RATIOS WHENEVER POSSIBLE.
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