All Posts By

Melissa Jenkins

Remaining Steadfast

Once in a great while, there comes a year in the economy and the markets that serves as a tutorial for the principles of successful long-term, goal-focused investing.  Two thousand twenty was just such a year.

On December 31, 2019, the S&P 500 stock index closed at 3,230.78.  This past New Year’s Eve, it closed at 3,756.07, some 16.26% higher.  With reinvested dividends, the total return of the S&P 500 was +18.4%.

From these facts, you might conclude that the equity market had a good year.  And you would be right.  What should be instructive to the long-term investor is how it got there.

From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks.  The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns, and the S&P 500 fully recovered by mid-August.

The lifetime lesson here is:  At their most dramatic turning points, the economy can’t be forecast, and the market cannot be timed.  Instead, having a long-term plan and sticking to it—acting as opposed to reacting—once again demonstrated its enduring value.   Waiting for a “pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for significant underperformance in 2020.

The American economy, and its leading companies, continued to demonstrate their fundamental resilience through the balance of the year, such that all three major stock indexes reached multiple new highs.   And despite headwinds caused by the coronavirus pandemic and subsequent lockdowns, companies in the S&P 500 paid out a dividend of $58.28 per share in 2020, surpassing the 2019 record of $58.24 and setting the ninth consecutive annual record.

Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution as 2020 came to an end.  There seems to be hope that the most vulnerable population groups could receive vaccines by spring, and that everyone who wants to be vaccinated can do so by year-end, if not sooner.

The second lifetime lesson of 2020 had to do with the presidential election cycle.  To say that it was the most partisan in living memory would not adequately express it.  Supporters of both candidates were genuinely convinced that the other would, if elected/reelected, result in the end of American democracy.  For investors who exited the market in anticipation of the election, they were surprised only to realize the enduring historical lesson which is: Never get your politics mixed up with your investment policy.

As we begin 2021, there remains more than enough uncertainty to go around.  Is it possible that the economic recovery has been largely discounted in soaring stock prices, especially those of the largest growth companies? If so, perhaps the coming year could be lackluster or even a declining year for the equity market?

Yes, it’s possible.  But how do we, as long-term, goal-focused investors, make investment policy out of that possibility?   Our answer:  We don’t, because one can’t.  Our strategy, as the new year dawns, is driven by the same steadfast principles as it has always been.  It is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and current-events-driven.

The Federal Reserve has assured that it is prepared to hold interest rates near current levels until such time as the economy is functioning at something close to full capacity, perhaps as long as two or three more years.  As investors, this makes it difficult to see how we can pursue our long-term goals with fixed income investments.  Equities, with their potential for long-term growth of capital, and especially their long-term growth of dividends, seem to be a more rational approach.  Therefore, we must tune out “volatility” and act as opposed to react.  This proved to be the most effective approach in 2020.  We believe it always will be.

May this year bring peace and joy to you and your families.  As always, we thank you for the trust and confidence you have placed in us and we look forward to serving you in 2021!

Elections matter, but not so much to your investments

Election years can be fraught with uncertainty as developments surrounding the candidates, their platforms, and their predicted effects on the economy and markets dominate the news. But should this stream of political information influence how we manage your investment portfolio?

A lengthy history of empirical research suggests not.

Elections matter, just not in all the ways you might think to an investor. Of course, they hold great importance in upholding the U.S. tradition of democratic, representative government. However, their impact on market returns has historically proven to be negligible, as shown in the chart below.

Comparing election years versus nonelection years:

60% stock/40% bond portfolio returns show no significant statistical difference.

 

Given the horse-race nature of political campaigns, you may think that in the months closest to an election, there is a noticeable uptick in volatility. Think again. In actuality, the opposite has been true. From January 1, 1964, to December 31, 2019, the Standard & Poor’s 500 Index’s annualized volatility was 13.8% in the 100 days both before and after a presidential election, which was lower than the 15.7% annualized volatility for the full time period.

Volatility and the vote: Markets tend to ignore elections.

Annualized S&P 500 Index volatility

Full time period: 15.7%

The bottom line: Elections are another one of those events that generate lots of headlines but that should not sway you from following the financial plan we created. It’s understandable to have concerns about the election. But as far as your portfolio and the markets are concerned, history suggests it will be a nonissue.

Part of successful investing is understanding what you can control, and letting your emotions take a backseat to the financial plan we put in place. By maintaining perspective, discipline, and a long-term outlook, you can sustain progress toward your financial goals, despite the short-run uncertainty that events such as elections can create.

Source: Vanguard calculations, based on data from Global Financial Data as of December 31, 2019. Data represents the 60% GFD US-100 Index and 40% GFD US Bond Index, as calculated by historical data provider Global Financial Data. The GFD US-100 Index includes the top 25 companies from 1825 to 1850, the top 50 companies from 1850 to 1900, and the top 100 companies by capitalization from 1900 to the present. In January  of each year, the largest companies in the United States are ranked by capitalization, and the largest companies are chosen to be part of the index for that year. The next year, a new list is created and it is chain-linked to the previous year’s index. The index is capitalization-weighted, and both price and return indices are calculated. The GFD US Bond Index uses the U.S. government bond closest to a 10-year maturity without exceeding 10 years from 1786 until 1941 and the Federal Reserve’s 10-year constant maturity yield beginning in 1941. Each month, changes in the price of the underlying bond are calculated to determine any capital gain or loss. The index assumes a laddered portfolio that pays interest on a monthly basis. All returns assume dividends/interest coupons are reinvested into their respective indexes. Average returns are geometric mean.
Note: Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Source: Vanguard calculations of S&P 500 Index daily return volatility from January 1, 1964, through December 31, 2019, based on data from Thomson Reuters.
Note: Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Notes:  All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
Investment Products: Not a Deposit • Not FDIC Insured • Not Guaranteed by the Bank • May Lose Value • Not Insured by Any Federal Government Agency

Charitable Giving

Charitable donations are a great way to show your support for an organization and, at the same time, provide tax-saving opportunities.  Not only does the charity benefit when an investor makes a gift, but the taxpayer may also be eligible to receive a tax deduction.

Earlier this year, the Coronavirus Aid, Relief, and Economic Security Act, better known as the CARES Act, was signed into law.  Among the provisions provided for in the Act is an incentive to encourage charitable giving.  The provision is available for cash contributions and provides a benefit for both types of taxpayers:  the itemizer and the non-itemizer.

  • For taxpayers who do not itemize deductions: these taxpayers are permitted an above-the-line deduction for a cash contribution of up to $300.  The goal is to help increase donations from those who otherwise may not choose to make a charitable contribution. This charitable giving benefit extends beyond the 2020 tax year.
  • For taxpayers who itemize: these taxpayers can deduct up to 100% of their adjusted gross income (AGI) in cash contributions, raised from 60%. This charitable giving benefit applies to tax year 2020.

Other beneficial charitable donation options remain in place from previous years including:

  • Qualified Charitable Distribution (QCD)
  • A distribution that would normally be taxable from an IRA owner who is eligible to receive a required minimum distribution and is paid directly to the qualified charity.  The distribution lowers the IRA owner’s adjusted gross income, effectively reducing his/her income taxes.
  • Donor Advised Fund
  • A donor can create an account and make a contribution of cash, securities or other appreciated assets.  The donation is eligible for a current-year tax deduction for the gift.
  • In-kind Stock Donation
  • Consists of gifting highly appreciated securities directly to a charity.  The charity can sell the securities and use the proceeds without having to pay tax on the gain.  The donor generally receives a deduction for the fair market value.

The benefit of a charitable gift can be significant. In order to maximize your giving and potential tax saving opportunities it is important to plan carefully and consult with your financial, tax and legal professionals.

As always, we are available to discuss these and any other planning goals in your life.

RW Investment Management, LLC dba R|W Investment Management (“RWIM”) is a Registered Investment Advisor.  This document is solely for informational purposes.  Advisory services are only offered to clients or prospective clients where RWIM and its representatives are properly licensed or exempt from licensure.  Past performance is no guarantee of future returns.  Investing involves risk and possible loss of principal capital.  No advice may be rendered by RWIM unless a client service agreement is in place.  The Firm is not a legal or tax advisor.

Investing During Election Years

The 2020 Election and Market Implications

2020 has been a notable year for stocks and the global economy. On February 19th, the S&P 500 reached an all-time high of 3,386 and was immediately followed by one of the quickest declines in history — falling 34% from its peak by March 23rd. The bear market resulting from the coronavirus pandemic, and the fact that 2020 is an election year, has caused many investors to question whether they should take a more conservative approach with their investment allocations.

What should you as an investor do to protect your assets?  Should you sell your stocks now and wait to see how the election turns out? Do you stay the course and hope your desired party is elected?  These are questions that investors are wrestling with as November approaches, but the truth is that none of us know what the result of the election will be this fall, or what its immediate impact will be on the market.

Let us look back at what has happened with the market since January 1926 under the various presidential parties.  The top line of the chart represents the growth of $1 invested in the S&P 500 from January 1926 through December 2019.

Markets Have Rewarded Long-Term Investors under a Variety of Presidents

Growth of a Dollar Invested in the S&P 500:  January 1926-December 2019

As evidenced in the chart above, the political affiliation of the party in office does not necessarily influence the long-term result of stock returns.  And while the market does experience periods of downside volatility, investors should not base their investment strategy on the unknown, such as the perceived outcome of an election.

Take, for example, the following news headline from September 2016: “Mark Cuban Predicts a Stock Market Crash if Trump Wins the White House.” Mark Cuban, a successful entrepreneur and billionaire, predicted the stock market would crash if Trump were to be elected in 2016.  Unfortunately, investors who heeded Mr. Cuban’s advice quite possibly missed out on all, or some portion, of the 47% increase in the S&P 500 since then.

Historically, there is no evidence that supports a correlation between the party holding the office of president and stock market returns.  While selling equities in anticipation of the unknown may feel good for a while, the decision to sell will eventually turn to regret when the market resumes its upward trend.

 In US dollars.
Past performance is no guarantee of future results. Declines are defined as months ending with the market below the previous market high by at least 10%. Annualized compound returns are computed for the relevant time periods after each decline observed and averaged across all declines for the cutoff. There were 1,115 observation months in the sample. January 1990-Present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

 

Timing Market Cycles

In the last 2 decades, there have been 3 notable market corrections that have sent the global economy spiraling into economic recessions. In 2000 we saw the S&P 500 drop nearly 50% due to the technology bubble. In 2008 the financial crisis caused an even larger drop of 57%. And now, a little over a decade later, the 2020 Covid-19 pandemic resulted in yet another 30+% decline.

Most investors are willing to accept the inherent volatility that comes with owning equities in exchange for the higher potential return they will receive.  However, wouldn’t it be nice to experience all the market upside and avoid the downside?  The strategy of selling equities now and waiting to get back in at the bottom of a market decline can be tempting.  And while it seems reasonable, there is a problem with this approach: Timing market bottoms is next to impossible.

Take a look at this chart illustrating market trading days over the past 27 years. Each line represents the daily percentage gain or loss of the S&P 500. Equities have historically had a 55% likelihood of going up and a 45% likelihood of going down on any given day. They also have historically had a 70% chance of being up in any given year.

Note that big down days are often followed by large up days — and therein lies the problem of attempting to time the market. When investors exit the market they take on an enormous amount of risk by potentially being out of the market on the large up days.  The chart below refers to the deviation in returns that resulted from being out of the market for various periods of time from 1990 – 2019.  Remaining invested throughout the entire period yielded the highest annualized compound return.

During a bear market, some investors believe that selling out or exiting the market will relieve them of the stress that results from riding the up-and-down rollercoaster of owning equities. But this stress is often immediately replaced by the new worry of trying to decide when to get back in.

Trying to time markets is not an investment strategy – taking an evidence-based approach and systematically rebalancing your allocation periodically is. Sticking to your long-term investment plan will have a far greater impact on long-term results than trying to win this losers game.

Information provided by Dimensional Fund Advisors LP.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero.  S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.

March 17th Market Update

We know there is uncertainty, as this is uncharted water for the world. While pandemics are not new, this particular virus strain is new, and as such, we are simultaneously trying to learn and understand while developing a response and treatment.

The uncertainty is being felt around the globe, and it is unsettling on a human level.

Unknowns are unsettling. Lack of understanding can lead to fear, fear can lead to panic and panic can lead to poor decision making and reactionary behaviors. The markets are no more immune to this virus than humanity.

With this in mind, our firm would like to share an internal philosophy that we adopted years ago.  We see our firm as an “ark” providing shelter to our clients to weather the storms. But, what is an ark? If you remember the story of Noah, the ark was a haven that allowed for shelter from the storm. It was a vessel that did not have a rudder or a propeller or even an oar. It was simply a refuge. A place to wait and be safe, while minding the ship.

This is how we view our firm. While we cannot control the pandemic, we will be a refuge while weathering “the storm”. We will mind the ship and provide counsel and services with your best future in mind. We will be a sounding board and a strong shoulder to help bear the load. We will do our best to keep your money working for you.

The thing about storms is that they eventually end. This will end. Just as the ark had to “wait and weather the storm”, so do we. However, when the storms and floods passed, those who emerged from the ark found themselves surrounded by newness and a hopeful promise for a bright future. We will continue to strive to place our clients in the greatest position of strength for a hopeful tomorrow.

In addition, we have attached our current office meeting contingency plan.  Until further notice, we will not be conducting in-person meetings to protect the health and well-being of our employees and clients.

As the day on Monday, March 16th came to a close – we were reminded that storms do pass with a beautiful rainbow over our great city of Boise.

Please call with any questions or concerns.  Stay healthy and strong. This too shall pass.

RW Meeting Contingency Plan - March 2020

March 12th Market Update

This past Monday – March 9 – was the eleventh anniversary of the crescendo of global panic that marked the bottom of the bear market of 2007-09.

It is a thing of the most wonderful irony that the world has elected to celebrate this iconic anniversary with – you guessed it – another epic global panic attack.

The morning of March 9th the opening level of the S&P 500 was 2,764, down over 18% from its all-time high, recorded on February 19. Declines of that magnitude are fairly common occurrences – indeed the average annual drawdown from a peak to a trough since 1980 is close to 14%. But such a decline in barely a month is noteworthy, not for its depth but for its suddenness.

As we all know by now, the precipitants of this decline have been (a) the outbreak of a new strain of virus, the extent of which can’t be predicted, (b) the economic impact of that outbreak, which is equally unknown, and (c) most recently, the onset of a price war in oil. (That last one is surely a problem for everyone involved in the production of oil, but it’s a boon to those of us who consume it.)

The common thread here is unknowability: we simply don’t know where, when or how these phenomena will play out. And in our experience, the thing in this world that markets hate and fear the most is uncertainty. We have no control over the uncertainty; we can and should have perfect control over how we respond to it.

Or, ideally, how we don’t respond. Because the last thing in the world that long-term, goal-focused investors like us do when the whole world is selling is – you guessed it again – sell.  Instead, we encourage you to focus on the sale prices of The Great Companies of America and the World.  They’re enjoying markdowns which we historically don’t see more often than about one year in five, on average

On March 3, the erudite billionaire investor Howard Marks wrote, “It would be a lot to accept that the US business world – and the cash flows it will produce in the future – are worth 13% less today than they were on February 19.” How much more true this observation must be a little over a week later, when they’re down over 20%.

This too shall pass.