Friday, August 5, 2011

Stock Market Craziness

Dear Clients,

I wanted to share my thoughts given the craziness in the stock market over the past week and hopefully provide some perspective which the press fails to report. Let's look at the market drop from some other angles:


Almost all of your portfolios have bonds in them. When you hear news that stocks are down remember that stocks only represent a piece of your portfolio. Further, if stocks are down, most likely bonds are up. This holds true during the past week -- bonds have been up.


The stock market is up 8.59% as measured by the S&P 500 over the past 12-months (as of 8/4/11). So, while it's true that stocks have been beat up over the past week, they are still in positive territory for the past 12-months. Year-to-date the stock market is down 3.50%. Longer term the stock market is up significantly. Since March 9, 2009, just about two and a half years ago, the stock market is up 86.31%. Thus, even though the market is down recently it is up significantly over the past two and a half years.


By comparison, our portfolios that are comprised of 50% stocks and 50% bonds are up 8.29% over the past 12-months, and are up 0.53% year-to-date. Longer term our 50/50 mix portfolios are up 54.49% since March 9, 2009.


It's funny, if I were to ask you how to make money in stocks you'd likely say, "buy low and sell high." However, while this is easy to say it's very counterintuitive. If you buy low you are buying something that is down in price, that nobody wants, that CNBC is saying is awful. Buying low is buying stocks now. Buying high is buying gold now. The average person buys high once an investment has gone up in value and the investor feels good. They generally sell after an investment drops and the individual feels bad. Of course, this is the opposite of what they should do. This emotional investing is the ticket to poor returns.


A good way to take advantage of the recent stock market drop is to rebalance your portfolio. Since stocks have done poorly recently your stock allocation may be lower and your bond allocation may be higher than the targets we've set. For example, a portfolio that was 50% stocks and 50% bonds in January may be 45% stocks and 55% bonds now. My recommendation is to rebalance. This means, in this example, to sell 5% of the bond portfolio and add the money to the stock portfolio, bringing the portfolio back to the target weighting of 50/50. Please let me know if you would like to rebalance your portfolio.


We typically position portfolios using a bucket strategy. "Bucket One" consists of the money you'll spend in the next year or two. This money is in money markets or equivalents. "Bucket Two" consist of money that will be spent in years three to ten years. This is our bond money. "Bucket Three" contains the money that won't be spent for ten years or more. With this methodology the money you have invested in stocks is money that we won't begin spending for ten years. This means that if there is a stock market drop we have ten years to rebound. Time is on our side.


Do you think Apple will be profitable over the next 1-3 years? In other words, do you think Apple will sell ipads, ipods, iphones, and computers? If the answer is yes and they are profitable, their stock will likely increase. Stock prices, while swayed by the noise of recent events, eventually reflect their true value based on a company's profitability/earnings. I believe companies will figure out a way to be profitable even given the current craziness. If this is true then stock values will go up.


The most expensive words on Wall Street are, "This time it's different." When we have stock market drops people - even the pros on Wall Street - tend to let their emotions get the best of them, and begin to believe that this market drop is different from previous market drops. We have always rebounded from stock market losses. Corporations have figured out a way to be profitable even when economic conditions have seemed insurmountable. I believe that this will continue to be the case. I believe that capitalism works and will continue to do so. If this is the case, then stocks will increase over time.


As you might expect by now, I am bullish on the long-term, and believe that the best action to take right now it to stay the course.

I hope this was helpful as you battle the negative sentiment created by illogical volatility and sensational news reporting.


Financial Planner Scottsdale said...

You bet your bottom dollar Apple will be profitable over the next few years! I see iPads everywhere I go now. Even Grandma has one. LOL.

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