Category Archives: History

The Election is Over. Now What?

The general election is over and the people have spoken.  Donald Trump will be the 45th President of the United States.

The run-up to November 8th has shown that our country is sharply divided politically.  Some people will be happy and others disappointed by the result.  However, it’s important to avoid letting your personal political beliefs and emotions cloud your long-term investment decisions.

Our job as your financial advisor is to help you navigate your way through the upcoming economic and political changes.  Forecasters can be wrong, and we have seen that pollsters can be too.  We avoid making big bets based on crystal ball gazing.  So how do we see the future?

As students of history we think that countries that keep their governments relatively small, in terms of spending, regulation, and tax rates, will provide their residents with an advantage in pursuing financial prosperity.  Regardless of who won this year’s election, we think that economic growth in the U.S. will generally continue, even with the policy mistakes the winner may make.

Since 2009, we have experienced what we’ve been referring to as a “Plow Horse Economy.”  That means that the macro-economy has gradually recovered even as many people have not seen much of an improvement in their individual economic lives.  The overall economy has grown despite the fact that debt, regulation and political turmoil have acted as a “Plow” holding the economy back.  Despite this drag, the major U.S. stock indexes are up almost 50% over the past four years.

We remain constructive on the economy and the markets.  With the election in the rear view mirror, we expect the Federal Reserve to begin its long, slow walk to raising interest rates from today’s near-zero percent.  We expect those moves to be very gradual and to have little long-term effect on the market.

One other statistic makes us optimistic for the future.  Consumer spending is said to account for 70% of the U.S. economy.  Unfortunately, that vast middle class that we think of as the “average consumer” has not seen much in the way of a fatter wallet over the last few decades.  That was one reason for the popularity of Trump’s message to the middle class that he would restore good paying middle class jobs.  We believe that if he is able to follow through on this promise, a resurgence of earnings growth by the middle class will be a positive for the American economy, and hope that he is able to implement feasible policies to promote such growth.

 

 

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Planning to Retire Someday? Start Planning Today!

Americans want help with financial planning.

A recent survey showed that most Americans don’t want to do their own financial planning but they don’t know where to go for help.  60% of adults say that managing their finances is a chore and many of them lack the skills or time to do a proper job.

The need for financial planning has never been greater.  For most of history, retirement was a dream that few lived long enough to achieve.  In a society where most people lived on farms, people relied on family for support.  Financial planning meant having enough children so that when you could no longer work, if you were fortunate enough to reach old age,  you could live with them.

The industrial revolution took people away from the farm and into cities.  Life expectancy increased.  In the beginning of the 20th century life expectancy at birth was about 48 years.  Government and industry began offering pensions to their employees.  Social Security, which was signed into law in 1935, was not designed to provide a full post-retirement income but to increase income for those over 65.

For decades afterward, retirement planning for many Americans meant getting a lifetime job with a company so that you could retire with a pension.  The responsibility to adequately fund the pension fell on the employer.  Over time, as more benefits were added, many companies incurred pension and retirement benefit obligations that became unsustainable.  General Motors went bankrupt partially because of the amount of money it owed to retired workers via pension and health obligations.

As a result, companies are abandoning traditional pension plans (known as “defined benefit plans”) in favor of 401(k) plans (known as “defined contribution plans.”) This shifts the burden of post-retirement income from the employer to the worker.   Instead of knowing what your pension income will be, employees are responsible for investing their money wisely so that they will have enough saved to allow them to retire.

In years past, people who invested some of their money in stocks, bonds and mutual funds viewed this as extra savings for their retirement years.  With the end of defined benefit pension plans, investing for retirement has become much more serious.  The kind of lifestyle people will have in retirement depends entirely on how well they manage their 401(k) plans, their IRAs and other investments.

Fortunately, the people who are beginning their careers are recognizing that there will probably not be pensions for them when they retire.  Even public employees like teachers, municipal and state employees are going to get squeezed.  Stockton, California declared bankruptcy over it’s pension obligations.  The State of Illinois’ pension obligations are only 24% funded.  Other states are facing a similar problem.

In fact, many Millennials we talk to question whether Social Security will even be there for them.  They also realize that they need help planning.  Traditional brokerage firms provide some guidance, but the average stock broker may not have the training, skills or tools to create a financial plan.  Mutual fund organizations can offer some guidance but getting personal financial guidance via a 800 number is not the kind of inpersonal relationship that most people want.

But there is an answer.  The rapidly growing independent RIA (Registered Investment Advisor) industry offers the kind of personal guidance that people want to help them create and execute a successful financial plan that will take them from work through retirement.  Many RIAs are also Certified Financial Planners (CFP™).  Many are fiduciaries who put their clients’ interests ahead of their own.  Dealing with a local RIA is like dealing with a family friend who’s can act as your personal financial guide.

For more information, and a copy of our book Before I Go, contact us.

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Bull and Bear Markets – A History

Following the “Great Recession” of 2008 not a day goes by without a prediction of another Bear Market. It’s often useful to remind ourselves of market history. While we need to remember that past performance is no guarantee of future results, we received the this fascinating chart which shows the historical performance of the S&P 500 stock market index since 1926. It’s quite dramatic.

Bull and Bear Markets

Bull and Bear markets follow each other.

What’s a Bear Market? It’s often defined as a drop of at least 20% from the previous high.

A Bull Market is measured from the point where the market stops dropping until it reaches a new peak.

What’s obvious from the chart is that historically, Bear Markets are relatively short and Bull Markets last a much longer time. A large part of this is driven by investor psychology. When markets begin to decline, the typical investor becomes concerned. As the value of their portfolio continues to go down they reach a point where fear of further losses forces them to sell. This selling contributes to a further decline. However, at some point all the fearful investors are out of the market. The decline stops, setting the stage for the next Bull Market.

  • The average Bull Market period lasted 8.8 years with an average cumulative total return of 461%.
  • The average Bear Market period lasted 1.3 years with an average cumulative loss of -41%.

Of course retirees on a fixed income have to be cautious because a major loss of retirement assets, even if a Bear Market is relatively short, can have a major impact on their lifestyle. For this reason it’s important to create portfolios that are going to participate in Bull Markets but are also robust enough to survive Bear Markets.

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It took 15 years, but the NASDAQ is back.

Fifteen years after it soared to its peak at the height of the dot-com era, the Nasdaq Composite Index cruised to a record closing high yesterday.

In the year 2000, the NASDAQ, driven to ridiculous heights by the technology stock bubble (often referred to as the dot.com bubble) collapsed, taking lots of people’s dreams with it.

A spike in stock prices driven by greed collapsed as people fled the technology sector in fear. As an aside, it provided a great opportunity for those who had the courage and skill to find outstanding bargains amidst the rubble.

The tech bubble of the 1990s is a great lesson in investor psychology. When values are driven by hope rather than by reality, people stop being investors and turn into speculators. The sad story of that time is that even mom and pop investors were caught up in the frenzy. And the collapse ruined many plans and some lives.

We read today about how great index investing is. It cheap, it’s effective and it works … until is stops working. Those who bought the NASDAQ index in 2000, if they had the fortitude to stick it out, would have found themselves breaking even after 15 years of being financially under water.

A good investment strategy always looks at risk. We know that “trees do not grow to the sky” and things that look too good to be true … are not. The first rule of making money is not losing it.

Our investment philosophy is focused on risk control. What that means in real terms is that when the market takes one of its periodic tumbles, it won’t take us 15 years to get even.

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The Dread of Weak Economic Data.

When I was younger I had a number of clients who were alive during the “Great Depression” of the 1930s. The experience shaped their lives. They were acutely aware of the effect that financial and economic panics had on their lives. Some lost their homes, even their families.  They were generally a cautious lot, ever concerned about a recurrence of those traumatic events.

Many of today’s investors wonder if the things that led to the “Great Recession” of 2008-2009 will recur. When weak economic data is released, some experience the beginning of panic.

Brian Westbury of First Trust puts it this way:

“Dread” is the perfect word for what many investors have felt in recent years. Some have experienced it daily since the bottom in March 2009. Some experience it whenever the stock market falls.

But dread really sweeps the markets when there is weak data, a change in fiscal or monetary policy or during market volatility. This means it has cast a pall over markets once or twice a year during the past six years.

Remember the feeling on September 2, 2011, when it was reported that payroll employment in August was a big fat zero? That was dread. Remember when real GDP in the first quarter of 2014 was negative? Dread! The thought of tapering? Dread! Or at least a tantrum.

Well, here we go again, except this time the bar for feeling dread has been lowered drastically. Payroll employment increased by 126,000 in March and some analysts reduced real GDP estimates to less than 1% for Q1. You guessed it: dread. Double dread!

There are a couple of things that have to be kept in mind. We have to take a look at a lot more than a single statistic, or even two; statistics which are by their nature volatile and subject to revision for months and even years. In addition, the recovery from the recession has been slow and labored; we have referred to it as the “Plow Horse economy.” When you’re growing at about 2.5% annually, bad weather, oil price changes, a West Coast dock strike or even normal volatility can bring you to low or even negative growth for a brief period. And then, of course, everyone’s worried about the effect that a rate increase by the Fed will have.

But none of this is going to choke off what we see is an almost irrepressible economy that is showing remarkable recuperative powers despite government policies that are not helpful.

While we expect to see a continuation of volatility, we also have faith in the entrepreneurial spirit of America. The funds that we have chosen are managed by experienced investors who have weathered many storms. With the return of warm weather, which brightens our lives and allows us to spend more time outdoors, we continue to invest with cautious optimism.

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The Biggest Problem for Wealthy Families

I recently visited a house that was once the largest private residence in the country: the “Biltmore” mansion. It was built by the grandson of the founder, “Commodore” Cornelius Vanderbilt, who built the original family fortune. His son doubled the fortune which, in today’s dollars would be worth $300 billion, making the family one of the ten richest in human history. But the heirs managed to run through this immense wealth.

Biltmore

Within just 30 years of the death of the Commodore no member of the Vanderbilt family was among the richest in the US. And 48 years after his death, one of his grandchildren is said to have died penniless.

In less than a single generation the surviving Vanderbilts had spent the majority of their family wealth!

No one today is that wealthy, but there is a lesson here for those who have accumulated multimillion dollar fortunes. While families today will openly discuss formerly taboo subjects like same-sex marriage and drug use, talking about family wealth seems to be harder to discuss.

Most wealthy people have wills and trusts but a substantial number of children have no idea of how much money their parents have. I have experienced this frequently in our practice when we disclose to heirs how much money they are actually inheriting. This applies not just to the wealthy but also the moderately “comfortable.”

According to a recent study, approximately 80% to 90% of families who have inheritable wealth have an up-to-date will. Only about half have discussed their inheritance with their children.

The reasons why parents don’t talk about money with their children range from not thinking it’s important, don’t want children to feel entitled, or they just don’t talk about money.

The problem is that the receipt of sudden wealth can have a deleterious affect on people. Too often a family fortune that has been created with great effort is squandered by people who have no idea that their inheritance is finite.

What can be done? Creating an environment and venue where family wealth can be discussed can be facilitated by a family’s financial advisor, ideally a Registered Investment Advisor – rather than a broker – who has the best interest of the family at heart.

If you need someone who can help you talk about money with your heirs, give us a call. We’ll be happy to help.

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Dow 17,000 is just another number.

Market pundits and the financial press always make a big deal out of markets reaching new highs … and a really big deal when it’s a round number. So for those who think that Dow 17,000 is a big deal, here’s a little history lesson about the Dow and other milestones that were a “Big Deal.”

November 23, 1954: The Dow Jones Industrial Average closes at 382.74.  The first time it closed above the peak it reached just before the 1929 crash. That’s a span of 25 years.

In the interim, the world saw the Great Depression and World War II.

November 14, 1972: The Dow Jones Industrial Average closes above 1,000 (1,003.16) for the first time.  It took 10 years before it broke through this level again.

December 9, 1974: Dow Jones Industrial Average index hits 570.01.

November 3, 1982: The Dow Jones Industrial Average closes at 1,065.49.

May 20, 1985: Dow Jones industrial average closes above 1300 for first time.

December 11, 1985: Dow Jones industrial average closes above 1500 for first time.

January 8, 1987: Dow Jones industrial average closes above 2000 for first time.

October 19, 1987: “Black Monday” Dow Jones Industrial Average falls 22.6%, the largest one-day drop in recorded stock market history.

January 29, 1989: Dow Jones Industrial Average regains all of the 508-point loss since October 1987.

April 17, 1991: Dow Jones Industrial Average closes above 3,000 for first time.

February 1995: Dow tops 4,000

November 1995: Dow tops 5,000

October 1996: Dow tops 6,000

February 1997: Dow tops 7,000

July 1997: Dow tops 8000

March 1999: Dow tops 10,000

January 2006: Dow tops 11,000

October 2006: Dow tops 12,000

April 2007: Dow tops 13,000

October 2007: Dow tops 14,000

2008: Beginning of the “Great Recession”

March 2009: Dow closes below 7,000

October 2009: Dow tops 10,000

July 2014: Dow tops 17,000

We need to avoid “irrational exuberance” as well as the belief that every milestone marks the top of the market. That is why careful, intelligent portfolio construction is so very important. No one knows what the future holds. We can be fairly confident that new highs will be reached. We just don’t know when and what route we will take to get there.

The issue for most people is not what the market does, but what their portfolio does and how it supports their lifestyle. For guidance, contact us.

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Warren Buffett and You.

An interesting, and instructive, article in Investment Advisor magazine made some great points about the Buffett legend.  Like most legends, it’s part truth and part myth.  In Buffett’s case there is more myth than truth.

Don’t get me wrong, Buffett is one of the world’s richest men, and a famous investor.  But it’s not a rags-to-riches story.  Son of a Congressman, young Warren had an elite education.  He bought a farm while in high school, not something you can do with the income from a paper route.

The legend is that he’s just a folksy stock picker with a buy-and-hold strategy.  The truth is that he made his first millions as a hedge fund manager, raking off 25% of the profits over a 6% hurdle rate.  His most famous investments came from bailing out firms in distress like GE and GEICO when they were in financial trouble.  Buffett got sweetheart deals from them because he had them by the throat and could lend them billions of dollars when they needed it fast.

That’s the edge that Buffett has that none of my other readers have. (Hi Warren)

One observer of Buffett wrote:

By oversimplifying this glorified investor named Buffett the general public gets the false perception that portfolio management is so easy a caveman can do it. And so we see commercials with babies trading from their cribs and middle aged men trading an account in their free time.

If you’re not Warren Buffett, what should your objective be with your investments?  Think about your goals.  See if they are reasonable.  Determine what it will take to get you there.  If you need help with this, get the advice of a professional.  If you are fortunate enough to have already reached your financial goals, decide what it takes to make sure you don’t lose it.

And then, unless you are determined to make a career out of investment management, hire a competent, credentialed, experienced, fee-only Registered Investment Advisor to manage your portfolio for you.  In other words, call Korving & Company – today – and make an appointment.

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What is the purpose of a stock market?

Before there was a stock market, there were stock companies.

A stock company allows individuals to pool their money to create an organization to operate and grow.  Stock is used to determine how much a person owns of a company.  Owning a stock does not necessarily create wealth.  Wealth creation can only occur if the stock can be sold to someone else who is willing to pay you more for it than what you originally paid.  This led to the creation of a market for people who owned shares in stock companies.

A stock market has two functions.  First, it allows the owners of stock to sell their ownership interest easily and quickly.  Second, it also allows people who would like to be owners to buy an ownership interest quickly and easily.  Now even people who do not have substantial financial resources can participate in the growth in value of large enterprises.

For example, the founders of Apple were able to raise money for their company by selling their shares of Apple stock to people who were willing to bet that the company would be successful.  That was 1976.  In 1980 the shares of Apple were first allowed to be publicly traded.  As a result, the founding shareholders were able to profit from their original investment and the company itself raised millions of dollars that it could invest in growth.  It also allowed people who did not personally know the founders to become partial owners and benefit from the company’s growth.  The stock market allowed people who believed in Apple computers to bet on the company’s future, and also provided them with a ready market for their shares if they needed to sell or decided they no longer believed in the company’s future.

The bottom line is that the stock market creates liquidity.  Without liquidity it becomes much harder for a company to raise the capital it needs to grow in a modern economy.

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Thanksgiving: remembering the Pilgrims

 

Each year the Wall Street Journal reprints the Pilgrim’s journey to the New World.

So they left that goodly and pleasant city of Leyden, which had been their resting-place for above eleven years, but they knew that they were pilgrims and strangers here below, and looked not much on these things, but lifted up their eyes to Heaven, their dearest country, where God hath prepared for them a city (Heb. XI, 16), and therein quieted their spirits.

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When they came to Delfs-Haven they found the ship and all things ready, and such of their friends as could not come with them followed after them, and sundry came from Amsterdam to see them shipt, and to take their leaves of them. One night was spent with little sleep with the most, but with friendly entertainment and Christian discourse, and other real expressions of true Christian love.

The next day they went on board, and their friends with them, where truly doleful was the sight of that sad and mournful parting, to hear what sighs and sobs and prayers did sound amongst them; what tears did gush from every eye, and pithy speeches pierced each other’s heart, that sundry of the Dutch strangers that stood on the Key as spectators could not refrain from tears. But the tide (which stays for no man) calling them away, that were thus loath to depart, their Reverend Pastor, falling down on his knees, and they all with him, with watery cheeks commended them with the most fervent prayers unto the Lord and His blessing; and then with mutual embraces and many tears they took their leaves one of another, which proved to be the last leave to many of them.

Being now passed the vast ocean, and a sea of troubles before them in expectations, they had now no friends to welcome them, no inns to entertain or refresh them, no houses, or much less towns, to repair unto to seek for succour; and for the season it was winter, and they that know the winters of the country know them to be sharp and violent, subject to cruel and fierce storms, dangerous to travel to known places, much more to search unknown coasts.

Besides, what could they see but a hideous and desolate wilderness, full of wilde beasts and wilde men? and what multitudes of them there were, they then knew not: for which way soever they turned their eyes (save upward to Heaven) they could have but little solace or content in respect of any outward object; for summer being ended, all things stand in appearance with a weatherbeaten face, and the whole country, full of woods and thickets, represented a wild and savage hew.

If they looked behind them, there was a mighty ocean which they had passed, and was now as a main bar or gulph to separate them from all the civil parts of the world.

We have so much to be thankful for, let us remember those who made the road to where we are that much easier for us.

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