Stocks, Volatility & Expectations

I'm realizing lately that stocks and toddlers have a lot in common: They both go through phases, and those phases don't last forever.Judy is my second-born, almost-two-year-old daughter. Everyone calls her “Juju”, and sometimes she seems like a happy, cooperative little angel. She'll sleep through the night, clean her plate at every meal, giggle in the tub while we wash her hair, and generally seem like a perfect little Gerber baby.But she’s our second child, so we know these idyllic moments are probably part of a passing phase. It may only be a few days before the clouds gather and the weather turns, and then we’ll be in the thick of it: Bathtub tantrums, hunger strikes, 2am wake-up calls, you name it.With our first daughter, these reversals seemed devastating. Every time she transitioned from an “easier” phase to a “harder” phase, we felt like she was going backwards. Even worse, we felt like there was something wrong with her -- or with us.But experience and lots of advice from friends and family helped us see that raising children is an ongoing series of “two steps forward, one step back” developments. While their long-term trend seems to be consistent growth and positive development, they’re up and down in the short term.When we regularly remind ourselves that Juju will be changing all the time, it’s much easier to adjust to those transitions when they come.Stocks are like toddlers: They go through phases, and those phases don’t last forever.Stocks were unusually cooperative between November 2016 and February 2018. They climbed steadily up without their usual levels of daily, weekly or monthly price fluctuations.This was a pleasant but conspicuous anomaly. As I wrote in March, the data shows that market volatility is the norm, and stable growth is the exception.Looking back, that 16-month stretch of calm, steady growth seems like the investing equivalent of your kid doing everything you ask her to do… for almost a year and a half.    “Get in the bath? I love baths!”    “Get dressed for school? Sure, mom!”    “Turn off the TV? No problem -- I wanted to play quietly with my toys, anyway!”If either of my girls was that cooperative for that long, I would really enjoy it. And I would appreciate it. But I wouldn’t expect it to last forever.As investors, it’s imperative to adjust our expectations and accept the market for what it is -- a volatility machine.It’s also important to remember that volatility is the main reason why stocks consistently provide a higher rate of return over the long term than safer asset classes like bonds.The markets are going to go up and down. Now that I’ve beaten this point about volatility into the ground, let me pivot toward how to incorporate it into your personal investing strategy. Speaking in very broad terms:

• If you have two or three decades until retirement, you can use volatility to your advantage by buying stocks during market downturns (in the business we say, “buy the dips”) and hold them for the long term.
• If you don’t have a long time to ride out potential declines in the stock market, you may want to consider pruning back your overall allocation to stocks after prices rebound (i.e., “sell the rallies”), and move the proceeds into something with more short term stability.

If you have any questions, feel free to call me or "Get in Touch" via the form below.

Tax Season: The Payoff of Hiring an Expert

I'm a big believer in DIY across the board, from home repairs to portfolio management. But sometimes you can gain a lot by calling in the experts.One of our family resolutions for 2018 was to spend our hard-earned dollars taking care of the things we already have, instead of accumulating a bunch of new stuff. After about one minute of deliberation, my husband and I agreed the best place to start was with our house. We have a tendency to put off minor repairs and maintenance, and I resolved to turn this around.We’d been dealing with some minor plumbing issues (or more accurately, not dealing with them). First we lost water pressure in our master shower. Then one of the bathroom sinks began draining really slowly. We made plans to watch YouTube videos and fix everything ourselves, but we never got around to it.Then we lost water pressure in our second shower. And the toilet backed up. Christian gave the toilet a nervous, tentative plunging effort, with no success. Thinking there might be a major problem contributing to all of these issues, we finally gave up our DIY dreams and called in an expert.The results were a huge relief. The issues were unrelated, and Andre, the plumber, fixed BOTH showers for a reasonable price. But the best part was that he also fixed the slow-draining sink and the backed up toilet for free. Why? Because each problem only took him two minutes to solve. With the backed up toilet, he said, “There’s a technique to it. If you know it, you can fix it in 30 seconds. If you don’t, you could cause it to overflow onto your floor.” Not a pleasant scenario.

Sometimes the right choice is to call in the experts.

Last summer, a new client came to my office with a big problem. She had a $25,000 tax liability from selling a rental house in 2017. She and I put together an aggressive plan to reduce her taxable income for 2017 in the hopes that we could cut down part of her tax bill, but I suspected something more could be done.Since I don’t give tax advice, I recommended she call a CPA with specialized expertise. She did just that, and her new CPA went back and re-filed some old tax returns that had been calculated incorrectly. The best part is that when he calculated her 2017 tax bill (correctly this time), her $25,000 tax liability had turned into a $6,600 refund. That’s a $31,600 difference!This is an extreme example, but one that underlines the potential value of hiring experts to handle the issues they are trained to handle.I'm a big believer in helping people DIY their finances. I also know that sometimes it helps to get a second opinion. If you have any questions about portfolio management or the role of a fiduciary financial advisor, feel free to call me or "Get in Touch" via the form below.

Volatility, Risk & Stocks

My daughter is a great traveler. She’s almost six years old and she loves visiting new places. But she has one Achilles Heel when it comes to travel: She gets sick driving on winding, hilly roads.She routinely warns us in the car if the going is getting a little too rough: “Not too many hills and zig-zags, mom. I don’t want to get sick.” Luckily we live in Texas, and 95% of the places we go in a car are reachable via nice, straight roads.Unfortunately for investors, those percentages are almost exactly reversed when it comes to ups and downs in the market. Volatility is the norm, and the straightaway highway of stable growth is the exception.This is really important to keep in mind. It's easy to be optimistic about stocks during an unprecedented stretch of steady growth, like what we saw from October 2016 through January 2018. Everybody loves taking the stock market escalator up, and almost no one likes taking the elevator down. But the fact is, you need to be able to tolerate the elevator drop in order to be there when the next escalator starts climbing.Let’s illustrate just how unusual that 16-month stretch of steady growth was, from late 2016 to early 2018. Here is a chart of the S&P500 for the last five years:Source: MacrotrendsNow let’s focus on the stretch representing October 2016 to January 2018, in the top right corner, where the line smooths out:Source: MacrotrendsThis sections looks noticeably different than the rest of the line. If we focus on the opposite side of the graph on the left, covering February 2013 through September 2016, we see more spikes, indicating short-term volatility.Source: MacrotrendsAnd if we go back further in time, we’ll get an even better idea of how unusually smooth the last 16 months have been. The following graph shows the S&P500 going back to February 1998. Here, we can really see how those short-term spikes have been the norm for the last 20 years, up until late 2016.Source: MacrotrendsNow, is February’s return to volatility here to stay? Some say yes, and some say no, but most analysts agree that this was a correction and not the beginning of a larger crash or recession. As I wrote in January, reviewing corporate earnings is a great way to gauge the direction of the markets, and earnings still look strong.So, remember: Volatility is normal. Things might smooth out again, or they may stay bumpy for a while. If 2018 sees the return of prolonged market volatility, we’ll just have to re-learn how to ride it out and view the “elevator drops” as great buying opportunities.Happy investing!

Inertia and Your Old 401(k)

My father-in-law always says that inertia is the strongest force in the universe. If the question is “Why is this thing here?”, the answer is usually “Because that’s where it was yesterday.”Take our house, for example. At any given time, there are at least three large boxes full of old clothes, toys and who-knows-what-else sitting in a hallway waiting to be handed down, returned to a friend, or donated to Goodwill. Sometimes they sit there so long we start perceiving them as an essential part of our décor strategy.But then one day, with a burst of inspired energy, we will actually load those boxes into a car and deliver them to wherever they are supposed to go. And then for a few brief days or weeks, our house and hallway seem like Buckingham Palace, with enough room and splendor for a royal wedding. And it just feels… glorious.This reminds me of how a lot of people leave their old 401(k)s lying around for years without even checking on them, much less actively managing them. And I totally understand. When you’re changing jobs, you’ve got a lot on your mind. Jumping through hoops to roll over your 401(k) may not be high on the priority list.But if you do have old 401(k)s lying around, here are seven reasons to motivate:

1. You’ll have more investment options. Your old 401(k) is limited to a set of mutual funds. When you roll over to an IRA you can invest in mutual funds, ETFs, individual stocks, individual bonds, and a plethora of niche holdings.
2. You may have better investment options. With more options comes the possibility of better-performing investments, lower fees, or both.
3. You can consolidate accounts and streamline your strategy. If you’re consolidating multiple 401(k)s, you’ll have all your old accounts in one place and be able to plan strategically.
4. You’ll be more likely to keep an eye on it. With your old 401(k)s now in one place, you’ll be more likely to pay attention to your new consolidated account than to an old 401(k) from four jobs ago.
5. You can take advantage of short-term opportunities. If the market changes you can make adjustments in real time, such as buying stocks when prices drop.
6. You’ll only have one custodian, login, etc. You're much more likely to monitor your accounts if you only have one custodian to go to for customer service and one username and password to worry about.
7. You can customize your accounts. With a rollover IRA, you can tailor your portfolio to serve your needs. Wanna retire early? Set it up to do that. Wanna turbo-charge growth? There you go.

When people describe overcoming the inertia to complete their rollover, I can see the relief and accomplishment on their faces. Their investments are organized, updated, consolidated, and (potentially) better performing. They feel like they just got paid to organize their own closet!So if you’re ready to roll over your old 401(k)s, here’s all you have to do:

1. Open a Rollover IRA account.
2. Call your old 401(k) and request that they process the rollover.
3. Pick your investments.

Making Sense of Stocks

Investment advisors spend a lot of time thinking about the future of the markets. I give people my opinions, I hear theirs, and I'm a total news junkie on the subject.The more I talk with individual investors, the more I realize how easy it is for people to get sucked into one of two opposite extremes when trying to make investing decisions.Extreme Position #1Daytrader data analytics approach: Gather all available data and develop an algorithm to predict the day and time that a stock will go up or down. Buy and sell accordingly. Try to figure out how to time the market on a weekly, daily, or hourly basis.Extreme Position #2Superstition + gut feeling approach: Gather no data but rely on a sneaking suspicion that if yesterday was good, tomorrow will be bad. The market was up in 2017, so the only direction it could possibly go in 2018 is down.I don't recommend either of these strategies. Your gut is not a rational analyst. And even if you have all the data in the world, don't try to time the markets.That said, there are plenty of good tools investors can use to make good, informed decisions. Today I’ll show you three charts I use to track the pulse of the market. All three focus on corporate earnings.

Corporate Earnings: Past, Present & Future

Over the long run, earnings drive stock prices. The chart below shows earnings actually generated by the companies in the S&P 500 from 1991-2016 (solid black line), with the black squares in the upper-right corner showing estimates of future earnings from year-end 2017 through 2019:Stock prices tend to follow the direction of earnings. Are earnings going up, down or sideways? Is there any reason to think their direction will change dramatically? These are the questions I ask myself every day.Forecasting earnings in the short term is difficult. Forecasting earnings in the long term is easier. The long-term trend has followed a +7.4% growth path since 1991, though it hasn’t been a smooth ride. The U.S. economy and its businesses tend to grow over time, so if you have confidence in the U.S. economy, it’s reasonable to think earnings could continue to increase.In addition to showing earnings, the chart below overlays the price of the S&P 500 index (the green line). I’ve also added two little green boxes with red question marks. Thanks to the new tax bill, there’s good reason to think corporate earnings will be higher in 2018 and 2019 than previously projected. If earnings do increase, the green line should move up as well, though not necessarily at 2017’s frantic pace.Finally, I keep an eye on the price-to-earnings ratio and inflation rates.The third chart shows that since 1960, stocks have traded at an average price of 19.2 times trailing earnings. As of the end of December 2017, the stock market traded at a P/E ratio of about 20.5x, which is not too far off the long-term average. When the P/E ratio is well below its average, it’s typically a buy signal, and when it’s well above average, it’s typically a sell signal. Today it’s neither, but at some point that will change.As useful as they are, these charts will never give the perfect answer. It is simply impossible to know how stocks will perform in the future. But understanding the relationship between earnings and prices will be a skill you can put to good use for as long as you invest in stocks.

Charitable Giving + Tax Savings

‘Tis the season for giving (and end-of-year tax planning)!Best practices for portfolio management suggest that you should review your portfolio every year or so to see if it should be rebalanced. Spoiler alert: After a huge run-up in the stock market this year, there’s a good chance your portfolio is now overweight stocks.Generally speaking, if you sell stocks in a taxable account in order to rebalance your portfolio, you’ll owe tax on the difference between the purchase price and the sales price. This is called “capital gains tax.” Whether capital gains taxes are paid sooner (as a result of rebalancing your portfolio), or later (as you sell the assets in retirement), they will eventually come due if you plan to use the assets during your lifetime.But there is a way to avoid paying capital gains tax while perhaps getting a nice deduction on your 2017 tax return.By donating appreciated shares of stock directly to a charity -- instead of selling stock first and then donating the cash proceeds -- you will avoid ever having to pay tax on the capital gain. Once the charity receives your donated shares, they sell the stock and keep the proceeds. The value of the appreciated shares is the amount of your charitable deduction. It’s a win-win.If this is something you’re interested in, call your broker or advisor to request a stock donation form. Your deadline is 12/31/2017 if you want the deduction for tax year 2017.Please note that Congress is considering changing the tax laws next year to reduce this tax benefit, so this strategy might not be as valuable in the future.