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Stock Market Update

For the first time in close to two years, the stock market is spooking investors. The decline was swift, sudden and unexpected.  It caught many people completely off guard.  A lot of the headlines I read over the weekend, yesterday and this morning were written to evoke more fear.  I’ve pulled together a few good quotes and excerpts to help put recent market events in perspective:
  1. “Don’t be scared, and don’t be impulsive. Be disciplined no matter what the market environment, and keep saving and investing according to your long-term plan,”  Kristin Hooper, chief global strategist at Invesco. Source
  2. “We are reminding clients to keep this in perspective and look to be proactive not reactive to the markets at this time. It is a big emotional test of…risk tolerance; we all want the upside but remember there is downside risk and goals, risk tolerance and time frames must always lead one’s investment decisions.”  Jeff Carbone, Managing Partner of Cornerstone Wealth. Source
  3. On average, there’s been a market correction every year since 1900… Instead of living in fear of corrections, accept them as regular occurrences. Source
  4. What’s more, the abnormal smoothness of the stock market over the past couple of years set investors up for a shock whenever stocks did fall at least 5%, as they did on Monday. As I pointed out last month, in the low-volatility market we’ve seen until recently, “even slight declines are apt to set off talk of Armageddon, and you will need to focus harder than ever on long-term returns to keep short-term losses from rattling you.” Source
  5. The Dow is down -0.4% year to date.  Source
  6. And then some people are selling because they aren’t people at all, but software programs that have been programmed to sell when others are selling. Source
  7. Losses — as in the Dow falling a little more than 7% over the past two trading sessions (including its biggest point drop ever on Monday) — loom larger than corresponding gains, according to those who study behavioral economics. In other words, losing 7% of your money hurts twice as much [as the pleasure of] making 7%. So, it’s normal, it’s human nature, that you’re in panic mode. But don’t act on your panic. Or at least don’t panic sell. Source
  8. “If investors were happy with their asset allocation on Thursday, they should find stocks more attractive today. Of course, investors sometimes are asleep at the wheel and a periodic wake-up call can be useful, but prices are just back to where they were a couple weeks ago, so why panic?,” Source
  9. We’ve had 15 straight months without a monthly loss in U.S. equity markets. Source
  10. The 665-point decline in the Dow Jones Industrial Average on Friday was the largest since June 2016. However, back in 2016, the Dow declined about 5%, and Friday’s drop was 2.5%. Source
  11. And while Monday’s drop was the biggest point drop ever, it still pales in comparison to the largest daily percentage losses: On Oct. 19, 1987, the Dow fell 22.61% and on Oct. 28, 1929 the Dow fell 12.82%. By contrast, Monday’s drop was 4.6%. Source
Still looking for some more perspective?  Consider reading this article written by CNBC a few years ago.
We are closely watching the situation and will act accordingly as the events continue to unfold.

Patience is an investment strategy

This post is written by Cliff Jarvis:

“The secret to investing, is to sit and watch pitch after pitch go by and wait for the one in your sweet spot. If people are yelling, ‘swing, you bum!,’ ignore them.”

Warren Buffet (Source)


I remember, years ago, a client called and exclaimed: “This market is on a rocket ride, you better get on board.” At the time, the stock market was trending higher and higher with disregard for how much the price (of stocks) were in excess of their actual value. The market continued to go up until it didn’t. And, as history shows, it didn’t end well. The trend exhausted itself and, in the spring of 2000, it turned, suddenly and dramatically. In 2007, the same scenario happened again.

Recently in an article by article by Rob Arnott Vitali Kalesnik and Jim Masturzo they pointed out that when the price of stocks is extended over their traditional value measurements it “is not a useful timing signal for market turning points, but is a powerful predictor of long-term market returns” and that currently “no matter what adjustments we make, the U.S. market is expensive.”

But wait, rapidly rising markets can be a great way to make money? As we are seeing, overvaluation can continue for some time.

Per wisdom of Jeremy Grantham, a legendary value investor: “I recognize on one hand that this is one of the highest-priced markets in U.S. history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.”
“Bracing Yourself for a Possible Near-Term Melt-Up.”

So what to do?

The pull of this rapidly rising market is too strong to ignore. The fear of missing out (FOMO) is irresistible. You’ve got to be in. You’ve got to do it. Prices may well move much higher and stay there! But know the stock market is currently no bargain. Maybe being patient and waiting to buy when prices are below values is an investment strategy.

I believe now more than ever it is important to know what you own so you can stay focused on the long-term. Stay diversified, do not over-invest, stick with quality, and wait for the ‘fat pitch’. Do not let the fear of missing out cloud your long-term investment decisions. If you are not going to try to time the market with short-term trades, do not be afraid to wait for a fair price.

The Optimists View of 2017

So often the headlines are dominated by bad news.  The headlines capture our attention.  They scare us.  They make us feel less safe.  But the facts simply do not support this view.  In reality, the world shows remarkable signs of progress.  Here are three amazing stats that just blew me away:


People living in extreme poverty decreases by 217,000 people per day!

325,000 more people are able to access electricity every day!

300,000 more people get access to clean water every day!


My Take On “What I’ve learned after 14 years at the most ‘depressing’ job in America”

This article has been shared widely since it was published a few days ago.  I appreciate the perspective the author shares as a journalist who’s covered personal finance topics for 14 years.  He has had to share many sad truths with his readers about how the majority of Americans are not saving enough for retirement, and how an increasingly complicated field of products and services leaves many Americans confused.

I agree with many of his comments and a lot of his lessons.  I have a different takeaway from the article.  It’s more proof that personal financial planning is more challenging than ever before and a trusted financial advisor is needed to help navigate the obstacles and set a proper course for people to reach their goals.

With all the tools and products that exist in the market, it is now possible to build a truly customized one-of-a-kind plan to help a client reach his or her financial goals.  Annuities may be a bad idea for most investors, but for some, an annuity is exactly what is needed.  Same goes for a reverse mortgage.  Most people will never have a need for one.  But for a select group of people, it may be a much-needed lifeline.

When someone gets their paycheck, they have lots of decisions on how to spend it.  As a society, we spend too many of those dollars in the present and save very little for the future.  Americans, in general, opt for things like a daily cup of coffee without realizing how much it adds up in the future ($3 a cup every workday for 30 years totals $23,400).  They make these decisions all day long without realizing the kind of impact this has on their future.

This, again, is where a financial advisor can help.  We often help to coach our clients in deciding how to pay off debts and nudge them into saving a little more for retirement.  In a sense, we are advocating on behalf of their future self.  And when market volatility returns, we are there to coach them to stay the course with their investment strategy.

To summarize, Roberts article provides a great perspective. I just wish he talked about how a financial advisor can help to provide guidance on many of these decisions that most Americans struggle to solve on their own.

Following the Herd

The following post comes from Edward, our summer intern.  He has been helping me prepare for a presentation later this summer on behavioral finance.  What follows are some really interesting comments about how our own behavior can affect our financial decisions… and in some cases it results in a negative outcome. Specifically, his comments deal with a very common behavioral concept called herding.

The human brain is hard wired to agree with the majority of a group in most situations. Whether it’s a multiple-choice question, advice, or even the stock market most people tend to agree with the majority. In 1951, Solomon Asch had created an experiment to test natural conformity. In this experiment he told the subjects they would be taking part in a vision test. A group of participants were gathered in a room, shown an image and asked very simple questions.   They were then shown the image below.

The question asked was “which line on the right matched the line on the left?” Despite the simplicity of the question, 32% of the subjects actually gave the wrong answer.  What the participant’s didn’t know was that everyone else in the room were in on the experiment.  Despite a room full of “participant”, there was actually only one person taking the test.  These “participants” were told to provide a wrong answer.

The actual participant would look around the room and see everyone had come up with a different answer. Then the participant would follow the lead of everyone else and copy their answer. Even though the other lines were off by a few inches, one out of every three would follow along with the crowd. One of the main reasons for their decision was social pressure. Most people wish to be accepted by the group. If they chose differently than the group then they might begin to feel like an outcast.

How does this relate to the market? 

Many people believe that a large group couldn’t possibly be wrong. Even if you are 100% convinced that the group is wrong you might still feel like following the herd is the best option. In the 1990’s many investors were turning toward Internet related companies. However, many of these companies had terrible fundamentals and were not appealing from a technical standpoint. What made people invest in these Internet companies was the fact that so many other people were already investing in them. The average person thought at the time that if thousands of other investors were investing in these Internet related companies then it must be a good move. This investment trend had lead many people to get trapped by the dotcom bubble that had cost them a large chunk of their portfolio.

How to avoid herding:

More often than not, jumping into a hot sector or stock because of a popular trend is not a smart move. Just because everyone is hoping on the bandwagon of a new investment, doesn’t necessarily mean it’s going to last.  The questions to ask yourself are “how does this investment contribute to my overall risk profile and asset allocation”  or “what role will this investment play in my portfolio?”

How to Plan When You Don’t Know Your Goals

Defining one’s goals isn’t easy for some people. Trying to envision what your life will look like at some point in the future can be difficult.  There are so many emotional and financial variables and so many unknowns in life that it can leave you feeling stuck or in a holding pattern until you find clarity.  We know that because it is a relatively common issue that we run into with our clients and an issue we try to help resolve for them. Retirements, illness, or the death of a family member can be very disruptive.

We help clients find clarity by trying to quantify the financial impacts of their situation and model other scenarios they are considering.

To illustrate what we do, let’s consider a typical client situation.  A couple with two college-age children have come to us looking for guidance in planning for their future.  They have very good incomes and a vacation property, but there expenses are high and they have not saved as much as they should have in the past.

Here is our process to help get this client out of their holding pattern:

  1.  We model their current financial situation and extrapolate those results out through their retirement.  Every conceivable financial variable is used to model the current situation: income expenses, accounts, assets, social security, etc.  The result is some perspective on the likelihood of maintaining the current lifestyle assuming nothing changes.  The model is summarized in a simple graphic, an example of which is below.
  2. The graphic above is presented to the client. The big circled number at the top provides a probability of success for the client to reach their financial goals.  The calculation uses Monte Carlo Simulations to imagine sequence of returns risk.  Basically, the model runs 1000 simulations to imagine how rates of returns affect a client reaching his goals.  What happens if there is a big recession early in retirement?  What happens if there is a big recession later in retirement?  What happens if the markets are flat for several years?  These are all scenarios that are modeled and considered and shows that of the 1000 simulations, 77%  result in their goals being met:
  3. In the first example above, it shows that their annual savings of $27,500 is used to successfully fund college education for two children as evident by the two green bars.  But it comes at an expense -their retirement is not fully funded as seen by the yellow bar.  This is where the conversation begins.
  4. We can begin to model changes on the fly to see how certain changes will affect their future in retirement.  In this example, the client has been wondering if they should sell their vacation property and use the savings for retirement.  We can quickly quantify the long term impact of that decision:
  5. Then we can see how that change will affect the probability of success.  We can see below that by making this one change, we have increased the probability of success from 77% to 93%.
  6. Sometimes, this gives the client enough clarity to make a decision and move on.  But that’s not always the case.  After the client has thought about making a major decision (such as selling a vacation home), they may come back saying they can not actually sell their vacation property and need to consider other options.  Below is a comparison of their current situation compared to a scenario in which they delay retirement for two more years.  The result is almost the same as if they sold the vacation property.

After this exercise, the client has two viable options to consider to get them on track for retirement.  By seeing certain scenarios modeled, it can make possible decision more real to them and hopefully more achievable.  The illustration we provide help them make better decisions.

There are lots of emotional decisions that revolve around major life decisions, like retiring, changing jobs/careers, and moving.  We believe that by addressing the financial impacts of these decisions, we can affect the emotional considerations that may be holding our clients back.  Our goal is to provide that nudge to get them moving in the right direction and to keep them from making mistakes.

If you feel like you are stuck or need help laying a clear path forward, please reach out to us: