BREXIT: Keep Calm & Carry On

Clients and friends,
It is Sunday afternoon and the dust is still settling from the United Kingdom’s popular vote to exit the European Union (Brexit).  

Many are concerned about Friday’s global stock market drop.  It was far from a crash on Friday, but whenever you hear that the Dow Jones Industrial Average was down 600 points for the day, you know that all is not well.  

So what happened and what can we expect?

In a nutshell, world financial markets were blindsided by the stunning Brexit vote.  Major British polls and (perhaps more influential) betting parlors had predicted a “no” vote on Brexit.  In fact, the day ahead of the vote, the U.S. Standard & Poor’s 500 surged to its highest level since March.  So when the Brexit vote was finally tallied, the expectations were shattered and investors worldwide voted by pushing the “sell” button on stocks.

And no unpredictable event such as this goes without the barrage sensational media reporting and speculation all of which serves to further increase anxiety.

So let’s apply some perspective.  Despite all of Friday’s doom and gloom, year to date the S&P 500 is roughly where it began the year (actually down 0.19%).  When you add in 2016 S&P 500 dividends, the S&P is actually up a little bit.  This was not a financial event like the collapse of Lehman Brothers in 2008 and the ensuring financial crisis that ensued.

Markets and economies around the world will continue to be buffeted by the shock waves from Thursday’s Brexit vote.  Why? Because these are uncharted waters as no country has ever left the EU before.

U.S. stocks remain more insulated from global developments than any other major equity market, as American companies generate 70% of revenues domestically. That […]

The three A’s of successful saving

Three A’s—amount, account, and asset mix—are important when saving for retirement.

No one needs to tell you that you need to save for your future—hopefully you’re already doing it. After all, no matter your age, and how far away retirement is, you want to be able to enjoy retirement and do the things you want without having to worry about money.

“It’s important to focus on three main things during your working years: the amount you save, the accounts you save in, and your asset mix,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “Of the three, of course, the first is the most important, as no account or asset mix can compensate for inadequate savings.”

You’ve probably heard this before—much of your retirement income is your responsibility. Most companies don’t provide pensions, and Social Security likely won’t replace all the income you need in retirement. In fact, we ran the numbers, and typically around 45% of retirement income needs to come from savings.

That’s why it’s important to follow our three A’s of saving.

Amount: How much—and how long—you save is key.

We suggest starting early and aiming to save at least 15% of your income each year toward retirement. Why? To help ensure that you have enough in savings to maintain your current lifestyle in retirement.

The good news: That includes any matching contributions from your employer to your 401(k) or other workplace savings account, like a 403(b) or governmental 457(b) plan. An employee match can make saving 15% easier. For example, Elaine earns $50,000 a year and her employer match is 6%. To save 15% of her salary, or $7,500, she would need to contribute only 9%, or $4,500. That’s because her employer […]

TV stock ‘experts’ don’t really know what they are talking about

Armies of stock analysts look at stocks in markets all over the world, determined to uncover those that they can say are a “buy.” They’re the articulate people on CNBC or CNN, employed by the world’s biggest brokerages and investment banks, talking about stocks and markets. Or else they’re the quotable “experts” in the print media.

Back in December I wrote, “There’s an entire industry dedicated to telling you what stocks you should buy. The main job of thousands of stock analysts in Singapore and Hong Kong – not to mention London and New York and other financial centres around the world – is to tell investors what stocks are a ‘buy’.”

These people sound like they know what they’re talking about. The reality, though, is that very few of them do.

I used to be a stock analyst. I looked at stocks in half a dozen sectors over my brokerage career, and I hired and supervised dozens of analysts. During that time I came to learn a few things about this industry…

“Buy” doesn’t mean you should buy. As we wrote in December, at the time 70 percent of stocks with an analyst rating in Asia were rated a “buy” by at least half of the analysts that were covering them. (That was just a few weeks before markets in the region fell 10 percent or more.)

But that didn’t mean that you, or anyone else, should have bought the stocks they recommended.

Stock analysts have a lot of reasons to call a stock a “buy.” They might want to cozy up to management (to get information – see below), to try to get banking business from the company, to generate commissions for their employer… or maybe they don’t […]

Moves to boost your odds of an early retirement

Let’s start with the facts: Most Americans likely will have a hard time retiring on time, let alone early.

For starters, the average retirement account balance for U.S. households ages 50 to 64 is $150,000 — and the median is only $12,000 — according to a report from The New School. Nearly a third of families have no savings at all, the study found.

Even if your nest egg is substantially larger, you’ll have to account for living longer. If it’s tricky to save for 30 years of income, stashing enough for 40 might seem especially difficult, said Christine Benz, director of personal finance at Morningstar. But that is not to say it can’t be done, she said.

The first step in any plan to leave the workforce ahead of schedule must be acknowledging the obstacles you’re up against. For one, you cannot count on high market returns, said Benz.

“Bond yields are very low, and the recent rally in equities suggest the decade ahead might not be as good as what we’ve seen in the past,” she said.

So — unless you’re on the receiving end of a big inheritance — the most secure way to fund an early retirement might be what’s easier said than done: pumping up savings during your working years.

Sound unfeasible for your circumstances? You’d be surprised. These three moves can bring you a big step closer to your early retirement dreams.

Harness opportune moments

In order to retire on time, experts suggest that people in their 20s should be saving at least 10 percent of income each year. Those who hope to retire early should be saving 15 percent at an absolute minimum, said Benz.

And folks who didn’t start saving as young adults may need […]

Prepare For Stocks, Bonds To Miss Historical Returns

John Bogle, the founder of Vanguard Group Inc., said investors should prepare for weaker results than stock and bond markets generated during his six-plus decades in money management.

The average annual return has been around 12 percent for stocks and 5 percent for bonds during his career, Bogle, 87, said Wednesday in an interview with Bloomberg Radio.

“That is not going to be true in the future,” he said. “It’s reasonable to think that stocks might return 4 to 5 percent in the next decade.” A bond portfolio, including corporate debt, could produce a yield of about 2.5 percent, he said.

The S&P 500 Index returned about 2.6 percent this year through 14 June and 1.4 percent in 2015. And central bank policies to stoke economic growth have depressed bond yields. Bogle, who advocates a buy-and-hold approach to minimize costs, said it would be a mistake to pursue more aggressive approaches to try to beat benchmarks.

“So it’s ‘accept the returns offered by the market, and don’t take risks to get higher returns, whether you’re talking about bonds or stocks,”’ he said. “And that’s not a very palatable thing.”

Source:  Bloomberg News–prepare-for-stocks–bonds-to-miss-historical-returns-27509.html

Investors continue to suffer from buying high, selling low

Mutual fund investors continue to suffer the consequences of their actions by sometimes zigging when they should be zagging to try and navigate market conditions.

The latest research from Morningstar measuring investor performance against the performance of mutual funds in which they invest, shows that investors still face challenges in using mutual funds correctly.

“Investors tend to buy high and sell low, missing out on a fund’s gains in value,” said Russel Kinnel, chair of Morningstar’s North America ratings committee.

Mr. Kinnel evaluated U.S. open end funds and calculated average asset-weighted investor returns and average total fund returns over 10 years through December, and found that investors cost themselves between 74 basis points and 1.32% per year by mistiming the market. The average annualized investor-returns gap for the 10-year periods ended 2012 through 2015 was negative 1.13%.

“Our investor returns data has shown that investing decisions made a decade ago have an impact that compounds powerfully over time,” Mr. Kinnel said. “The latest data shows that investors still face challenges in using mutual funds correctly.”

The annual study, which Morningstar calls “minding the gap,” underscores the risks of trying to time the market, according to Mr. Kinnel. “We know that, collectively, market-timing is not good,” he said.

Source:  Jeff Benjamin

How the wealthiest Americans got rich may surprise you

As much as everyone likes a good get-rich quick story, the rich typically didn’t make their wealth overnight, which should comfort investors who are concerned that buy-and-hold investing no longer works.

Support comes from the 2016 Insights on Wealth and Worth survey conducted by U.S. Trust. The study explored the common success traits of wealthy Americans across all generations, surveying close to 700 individuals with at least $3 million in investable assets. The results, says Chris Heilmann, chief fiduciary executive at U.S. Trust, show that “the American Dream is alive and well.” (See the survey results.)

“What has shaped generations of wealthy American families are their deeply held values and beliefs, rather than growing up privileged,” Heilmann said. “Their advantage in life comes not from financial privilege or inheritance, but from basic values and discipline shaped by family.”

According to the survey, more than three-quarters of the wealthy investors surveyed came from middle-class or lower backgrounds, and earned their wealth mostly through income from work and investing.

They took one of three basic paths to wealth: earning it; investing to get it, or becoming an entrepreneur. Only 10% attributed their wealth mostly to an inheritance. In short, the wealthy have worked their way to their enviable portfolios, and took a long time getting there.

Of the large group of wealthy who invested their way to wealth, there was nothing sexy and fast about how they put their money to work. “Long-term buy-and-hold” strategies for traditional stocks and bonds were the path taken by around seven of every eight of the high net-worth investors surveyed. More than 80% said they claimed their fortune through a series of small wins, as opposed to taking big investment risks; the same percentage said […]

4 Reasons Why This Stock Rally Has Legs

The stock market is close to new record highs in a replay of what it tried but failed to accomplish after last year’s correction. The 2015 rally came within an eyelash of new highs late last year only to fail and crash again into the New Year. As the S&P 500 hovers again just below record highs, many investors believe the stock market is setting up for yet another disappointment.

But the contemporary rally looks and feels much more likely to break to new record highs than it did last year. Much of the character of the 2016 stock market rally is very different from the character of the 2015 rally.

First, the 2016 rally is much “broader” than the participation exhibited by the 2015 stock market rally. The equally-weighted S&P 500 index has strongly and persistently outpaced the market-cap weighted index. That is, this rally has much broader participation than was the case in 2015 when the stock market recovered from the correction but it was led by a small number of S&P 500 stocks while most underperformed.

This is also highlighted by the outperformance during this rally of small cap stocks and by the equal-weighted Value Line index of 1700 stocks, both of which did poorly or only matched the S&P 500 index in the 2015 rally. Does broader participation suggest more sustainability in the current rally?

Second, unlike the 2015 rally, the stock market is not facing any pressure from the bond market this year. The stock market rally last year was pressured by an almost 50 basis point rise in the 10-year treasury yield which ultimately contributed to its failure to establish a new high. Today, by contrast, despite the stock market knocking on […]

Yellen, S&P 500 Could Determine Next President

Depending on your viewpoint, this year’s presidential election is disconcerting, entertaining, puzzling or all of the above. According to one pundit, it’s also potentially the most impactful election in decades, and the expected close race could be decided not by Donald Trump’s big mouth or Hillary Clinton’s possible indictment (although both are possible wildcards), but by interest rate hikes and their impact on U.S. equities.

Speaking at Pershing’s INSITE 2016 Conference in Florida, the chief equity strategist at Federated Investors, Philip Orlando, dusted off his crystal ball and gave his far-ranging take on the economy, the markets and politics. And while he didn’t put himself on the line with absolute predictions about who’ll win the election and what the markets will do, he used history as a guide to help investors—and voters—divine which way the winds might blow.

The context: Orlando believes Janet Yellen is probably a lame-duck one-term Federal Reserve chief because whoever wins the presidential election probably won’t renominate her when her term expires at the end of 2017. As a result, he offers that Yellen sees the writing on the wall and is managing her legacy by checking off items on her to-do list.

The first item was tapering the quantitative easing program, which she completed in December 2014. The second was beginning the process of raising the Federal Funds rate, the overnight lending rate that depository institutions charge each other for balances held at the Federal Reserve, which is a key monetary policy tool. The third is scheduled for next year with plans to start unwinding the Fed’s $4.5 trillion balance sheet.

Orlando added a fourth item—avoid a double-dip recession. The thing the Fed is most scared of, he said, is to make a […]

Investors Far Gloomier Than Facts Justify

Apparently we are a bunch of scaredy cats when it comes to the stock market.

Investor expectations of another 1987-style crash aren’t just a little bit off. They are way too pessimistic when compared with reality of historical events. And those concerns are exacerbated by news reports of poor market performance, according to a recent study.

It wouldn’t matter too much if such a wretched outlook didn’t aversely affect investor behavior. But it does change investor behavior.  The study, which was conducted looking at regularly collected institutional and individual investor sentiment data over a 26-year period, finds a startlingly high level of pessimism.

“We find evidence that the average, subjective probability of an extreme, one-day crash on the scale of 1987 or 1929 (i.e. greater than 12.82%) to be an order of magnitude larger than would be implied by the historical frequency of such events in the U.S. market,” states a recent study from the National Bureau of Economic Research titled “Crash Beliefs From Investor Surveys,” by William N. Goetzmann, Dasol Kim and Robert J. Shiller.

“Over the 1989-2015 period, the mean and median probability assessments of a one-day crash [occurring in the next six months] were 19% and 10%, respectively,” the report states. Such estimates are ”unreasonably high given the incidence of such events in U.S. capital market history.” 

More simply, the surveyed investors forecast up to a one-in-five chance of a massive one-day crash over the next 180 days.

Such a move of at least 12.82% in one day would mean the S&P 500 would dive from around 2111, its price Thursday, to 1840 or further in a single day! The exchange-traded fund that tracks the index, the SPDR S&P 500 (SPY) , would move proportionately.

These crash fears aren’t realistic, as anyone who has followed the market […]