Atlanta Planning Guys

On CNBC this morning, terms like “oversold” and “irrational pessimism” were uttered frequently.  Countless charts and graphs showing stock prices and current yields were abundant (some of them were amazing!).  Comparisons of corporate profits now and corporate profits in 2003 (generally, they are MUCH higher now) frequently appeared on the screen.  The stock market is at the same value now as it was then.  The traders on the floor, at one point, were cheering so loudly as the market came off their lows, that the announcers had to stop talking.

All of this got me thinking about a math term from my Georgia Tech days.

Reversion to the mean:

“Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variable from its mean, the greater the probability that the next measured variable will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event.”

In plain English: when things get out of whack, they tend to get back in line.  Don’t know when, but it tends to happen.

Keep the faith.

We get emails from every imaginable investment company – usually monthly or quarterly.  During times like these, they come more frequently.  Continuing our temporary onslaught of constant communication with you, the main goal being to provide something easy to read and digest during this hectic time, I want to share this attachment from the Chief Investment Strategist at MFS.

Hopefully, it gives you a positive outlook for the future despite the gloomy week.

Another slide from the JP Morgan “Guide to the Markets 3Q 2008″ series.

Each color on the chart (click here for a bigger version) represents a different major asset class, year by year, since 1997.  As an example, follow the Russell 2000 (black square), year by year, since 1997.  Notice how it has been a top performer and a bottom performer. 

You will also notice that this pattern holds true for most of the indices (colors) represented in the chart.

Next, focus on the “balanced” portfolio (white).  This portfolio is hypothetical.  It is made up of a combination of several of the various indices (much like your individual portfolios are).  This balanced portfolio was NEVER a top performer. BUT, it was never a bottom performer either.  Of course, past performance is no guarantee of future results.

This is a hypothetical illustration and your results will vary

This is not intended to be specific advice, please contact your advisor regarding your specific situation.

All indices are unmanaged and can not be invested into directly

JP Morgan puts out a “Guide to the Markets” each quarter.  Interesting nugget….
                                                  

Past performance is no guarantee of future results (people are giving that statement more weight now than ever!).

The slide contains two separate charts.  The top one shows the University of Michigan Consumer Sentiment Index year by year since 1970.  It shows the S&P 500 index return for the 12 month period following each low in consumer sentiment for the five times since 1970.
 
The bottom chart shows the S&P 500 index return for the 12 months following a spike in unemployment of at least .5%.  In May of 2008 we had just such a spike.

                                              Yes                                         No     

With the recent volatility in the markets, investment companies have re-doubled their efforts in providing advisors like us with materials meant to “calm the nerves” of our clients or provide some perspective.  I have quoted this slide, from American Funds, on many occasions (or numbers similar to it).  It is my favorite “market nugget”.

Although the markets have given up much of their gains from Thursday and Friday of last week, those days represented large upward movements.  In most cases, days like Thursday and Friday are unforeseen and unpredictable.

 Successful investing can sometimes be described as “time IN the market, not timing the market”.

Your gut may be telling you that “this thing” isn’t over, the economy is in trouble.  The next President (insert name here) is going to mess the economy up further.  Gas stations are out of gas.  Inflation is right around the corner.  Taxes are going to go up and further slow the economy.  Home prices are going to go lower and more mortgage defaults are going to happen.  The great depression is ready for a repeat.
 
After thinking about the ideas above, thrown at us every time we log on to the internet or turn on the TV, who WOULDN’T be scared to invest?  Who WOULDN’T want to move their money to something safe or more conservative and “wait for the storm to pass”?

Problem is……no one can predict when these big upward movements will happen.

 
As much as I would like to come up with witty things to say or profound ideas about investing that are fresh and inspirational, sometimes you just have to “borrow” it from the best….I love this picture….Dairy Queen is way underrated, in my opinion.

 Warren Buffett on CNBC, Wednesday September 24^th:

 
“In the short-run the stock market is a voting machine, in the long-run it’s a weighing machine.  As a voting machine, it responds to people’s emotions.  There’s no literacy test for voting. You vote according to how much money you have, not according to how smart you (are.)  So the stock market does some very silly things in the short-run.  Over the long-run, it behaves quite rationally.  And, you know, five years from now, ten years from now, we’ll look back on this period and we’ll see that you could have made some extraordinary buys.  That doesn’t mean it won’t get more extraordinary a week or a month from now.  I have no idea what the stock market is going to do next month or six months from now.   I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well”

In the wake of the recent Olympic Games, I’m inclined to draw on the parallels between those fantastic events and the ‘not so fantastic’ events that have unfolded in our economy lately.  Coincidently, this happens to be the time when Cass and I are sitting down with our clients to review their accounts and asses the most recent quarter.

I ask you this; did your portfolio earn any medals this last quarter/month/year?  The Investment Dashboard^TM that Cass and I developed is used to grade money managers and mutual funds on their performance.  This is one of several tools that we employ to help us keep our clients funds on track to meet their objectives.

These athletes that compete at the highest level have been training for years.  One of the things I noticed about many of them is that they all dealt with adversity in the past 4 years (since the last games).  Now some would argue that 4 years is a long time to train for anything.  What about 10, 20 or even 30 years.  Imagine for a moment that you train for something 30 years.  Do you think that somewhere along the line you would have to deal with adversity?  A setback, like setting a time that was not your best, or losing a race you should have won.

I see many similarities in this and our economy at the moment.  We are dealing with some setbacks.  These are no different than the ones from years past, simply wrapped in different paper.  Let’s imagine for a moment that Michael Phelps has an off day at the pool in 2006.  He wasn’t eating properly or stayed up late the night before a big race.  He goes out and finished 3^rd or worse…Dead Last.  Does it seem prudent for Mr. Phelps to abandon swimming at that point and try to make the Olympic team running the 100M sprint?  I don’t really have to answer that question, do I?

Of course he doesn’t change sports. But why?  He stays in the pool because he knows that overcoming setbacks is one of the things we need to do to reach our goals.  Understanding these setbacks and what causes them, is one of, if not the biggest, reason we succeed in the future.

Now take your portfolio.  Chances are quite certain that you have seen setbacks in recent months.  That is absolutely no reason to abandon the investment philosophy and planning that has gone into place.  It has become human nature (in so many aspects of life) to crave immediate results.  Money management doesn’t work that way…much like training for the Olympics.  Develop a plan and stay the course.

Now I’m not going to sit here and tell you that the plan you put in place last year is still a sound plan.  Even the Michael Phelps of the world have to change up their training/diet/routine to achieve results.  However, changes to your portfolio, much like his training regimen, must happen for good reason, and in most cases, due to some fairly objective research.

Bottom line: quit chasing the winners every time you look at the financial news on TV, in magazines or the newspaper.  Rely on the knowledge and experience of a Financial Planner to help guide you to your goals.  There is a very good chance that your portfolio may be in line for the bronze this quarter, and you go and muck it up by making changes that weren’t necessary.  Let someone help you make sound decisions, with your priorities in mind, and you’ll be standing on that podium when retirement comes knocking.

We have certainly heard quite a bit about the obesity issue in the country.  People are eating too much and not exercising enough.  There is another problem that we run into far too often: overweighted portfolios.  Someone will have way too high of a percentage of their investments in one asset class.  Even worse is when a high percentage is in just one stock.

It is becoming increasingly common that a company will incent its employees with stock options or match their 401(k) contributions with stock in the company.  When you combine that with the fact that most investors are constantly trying to chase performance, you end up with lots of money in very few places.

Asset allocation is crucial to achieving financial success when investing.  There are many different asset classes to choose from:

• Large Cap Growth
• Large Cap Value
• Mid Cap
• Small Cap
• International
• Bond
• Emerging Markets
• Alternatives
• …the list can go on and on!

The simple answer to your question (you were going to ask me where your money should be invested) is everywhere.  For the most part, an investor should own a piece of most all of the standard asset classes.  What percentage in each will be determined by your tolerance for risk, time horizon and overall goals for the money in question.

Please consult your advisor about how well your portfolio is protected from the volatility of one asset class, stock or market correction.  Your portfolio will thank your for it.

My mother always used to tell me “You have to be able to look yourself in the mirror”.  That is such good advice and truly applies to so many aspects of our lives.  This certainly holds true when it comes to financial planning.

There are so many of us that want to achieve financial security…who doesn’t?  I can say that Cass and I enjoy working with people who have truly accepted personal responsibility for the achievement of their goals.  It sounds silly, but if you won’t do it…then who will?

When you make the decision to hire a financial planner, you need to be prepared to look yourself in the mirror and be totally honest about what you want, need and are willing to do.  Additionally, be prepared to share your inner most emotions and thoughts with that person.  Think of the financial planner as your doctor.  The more information you disclose to that person, the more helpful they can be.  You have to have a clear picture of your abilities and willingness to work hard to achieve your goals.  The financial planner’s job is to help you define and clarify your goals.  This is virtually impossible if the world you are living in is drastically different from one you have in your head.

Do some soul searching!  Talk to your spouse or confidant.  Be truthful and honest with yourself and the process will be much more beneficial to all parties.

Clients frequently ask my opinion on the purchase of various luxury items; beach houses, boats, mountain houses, sports cars, muscle cars, even planes.  I try to be consistent with my answer, delicately balancing the fact that this item has likely been a life long dream with the fact that this could be a BAD IDEA.

First, can they afford it?  Most of the time, no.  It is pretty easy to double back to our “sustainable withdrawal ratio” conversation (I like to call it the rule of 22.2 sometimes – at some point this concept will be all over our blog in different posts).  People get so excited at the thought of owning one of the items above.  I know I do.  It just takes some “talking in off the ledge” to help them from making the leap.  I would venture that 8 times out of 10, the client realizes that this just isn’t in the cards for them financially…YET.

Secondly, when they CAN afford it, the conversation changes.  I feel it is my responsibility to play devil’s advocate.  Sure, many of our clients have purchased these items – and been better off for it.  I mean think about it.  A beach house that you spend a lot of time in with your family and friends on vacations.  How great is that!  A boat that you spend the weekends sipping cocktails and enjoying the water (with a designated driver of course!).  These types of purchases can be rewarding and enjoyable. 

I try to get the questioner to stop and think… Are you really considering all the expenses involved?  Are you assuming that you can resell this item for the same, or even more money?  Is that really a valid assumption?  What if you can’t sell it for that much?  Markets change.  Have you considered the budget you will need to accrue for repairs? Gas? Insurance?

I have heard more than one boat owner say, “the best two days I ever had with my boat were the day I bought it and the day I got rid of it”.  Food for thought.

AND FINALLY……….  Can you just rent the thing, any time you want, for a fraction of the cost of ownership, with little to no financial responsibility beyond the rental period?   Most of the time, the answer is YES! 

“Don’t buy the cow when you can get the milk for free (or just a little rent).” 

But hey, it’s fulfilling a dream.  I get it.  I understand it.  I would probably do the same.