Tag Archives: Long term investing

The Good Times Keep Rolling

By Larry Luxenberg  

For investors, they say, hope springs eternal and never more so than with the promise of a new year and new beginnings. As 2019 began, though, investors were worried mightily. While stock market returns for the year, as measured by the S&P 500, were only down 4 percent, the fall and winter was dreadful and investors were afraid.

Those fear are now long forgotten after a powerful and steady rally that lifted the market by 31.49 percent, the 18th best year on record in the last century.

But given that 2019 was such a great year, shouldn’t we just be grateful, pack our cards away and sit out 2020. This seems especially prudent given the rising tensions with Iran.

Based on the historical record, these fears are just as unwarranted as the ones a year ago. Nothing in the stock market record guarantees a good year (or for that matter, guarantees anything) but the historical record suggests that on average, investors would be well served by continuing their commitments to the stock market.

We have good stock market records since 1926. Of the 94 years that encompasses, we’ve had 18 years as good or better than last year. Of the 17 times before last year, the average return has been a gain of 11.67 percent. That’s close to the average gain of 12.09 percent for all 94 years.

It’s true that 6 of those 17 years have had negative returns but only one of those years, 1937, in the midst of the Great Depression, had a return worse than a 10 percent loss. In 1937 the S&P 500 declined by 1937 after some failed policy moves including premature austerity. In three of the years, losses were under 5 percent. In the remaining two years, the losses were a little over 8 percent.

What’s more, in fully 7 of the years gains were over 20 percent and in three of the follow up years, the gains were over 30 percent. In short, the good times kept rolling.

Investors are always inclined to be fearful and to be cute about moving money in and out of the stock market. But based on the modern historical record, they’ve do well to emulate Rip Van Winkle, take a snooze instead of action, and they are more likely than not to be pleased with the result.

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Your Dog and Your Investments

By Larry Luxenberg  

Nearly everything about your investments and your dog is different, except for this: both are precious to you.

Your dog needs attention and affection. Your investments do not. They work best in a quiet corner, getting little attention and given sufficient time to work their magic.

A dog absolutely needs exercise. Your investments do not. The investments do best when they are not moved or stirred up. The longer they are not disturbed the better they are likely to do.

Your dog is your one and only. Your investments are not. They work best when they are widely distributed around the world, not when your affection is concentrated on a favored few.

Finally, your dog is loyal. He is your best friend and rewards you for your efforts.

Your investments are totally indifferent. They are more like an ungrateful teenager. They could care less whether you live or die, prosper or suffer in penury.

You may be grateful to your investments if they have stood you well over the years but be assured that your investments do not return your affection. You can fall in love with a stock but the stock does not love you. Hanging on too long out of affection has destroyed many investment relationships.

Like a dog, an investment can bark or bite but it will never greet you warmly or share a cozy evening.

Both a dog and your investments have a place in your life but confuse the two at your peril.

 

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There’s Never a Good Time to Get Gas

By Larry Luxenberg  

I never feel pumped to get a gas fill up for my car. I’m always in a hurry or tired or it’s unpleasantly cold or rainy outside.

But I also don’t like it when the light goes on with the dire warning that I’m running on fumes.

It’s also like this about personal financial planning. There’s never a good time to straighten up the mess of your financial affairs. It takes energy and gumption to deal with the reality and the complicated forms and ideas that determine your financial fate.

But if you don’t do it, just as if you don’t get gas, dire consequences await.

Your financial affairs may be complex and daunting but you don’t have to do everything at once. It’s better to start small than not at all.

And it’s better to start now that waiting for whatever your current excuse is to pass.

The key thing in investing and personal finance is time. The younger you start, the easier things are. Investment returns compound over time and the longer you invest, the more money you will have.

It may not be pleasant to tackle financial planning but it can be very rewarding.

There’s never a good time to start, so just do it soon.

 

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What You Keep

By Larry Luxenberg  

The easy thing to do when you are investing is to look at how much your portfolio is going up or down.

But that’s not what’s really important. What’s important is how much of your investment portfolio, you get to keep and how much goes to Federal, state and local taxing authorities.

For example, an IRA defers taxes until you take the money out. Under current law, once an investor turns 70 1/2, he has to start taking money out of the IRA. This is called a required minimum distribution.

When an investor takes money out of the IRA, he has to pay ordinary income taxes on the withdrawal. This can be a third in combined taxes or even more.

If he has a Roth IRA and is over $59 1/2 and the Roth has been open five years, he probably won’t owe any taxes.

If he has a regular taxable account — no retirement savings vehicles — and owns mutual funds, he may owe taxes even if he doesn’t do any trading himself for the year. Mutual funds must distribute most of their income each year to avoid saddling their shareholders with double taxation.

In a strong stock market, like the market this year, gains accumulate in actively managed mutual funds and taxable distributions can be quite high.

Investors need to be aware not just of their investment returns but of how much of those gains they will keep. That makes a huge difference in long-term financial well being.

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Under the Hood

By Larry Luxenberg  

All investors crave simplicity. That can come at a high cost.

Many investors look at the title of the investment but don’t look under the hood.

A prime example is target date funds. These investments are one of the fastest growing investment products in history. According to the Investment Company Institute, more than $1 trillion is invested in target date funds.

A target date fund is is invested based on your retirement date. Essentially the only thing the investment manager knows about you is your age. But are all 52 year olds the same? Maybe some are skinny and some are fat. Some have plenty of money and some can barely rub two nickels together. Some will retire before 65 and some afterwards. Some will work part-time and some will retire in Central America. Few are average but that’s what target date funds assume.

It’s important to know a lot about an investor to decide how to invest for him. Otherwise you might take too much risk or not enough and returns and investors’ piece of mind might suffer.

Even more compelling, each target date fund is different. Investment managers have different ideas about how to invest for the average 52 year old.

It’s OK to invest in a target date fund but make sure you look at more than just the name. Otherwise, you may learn too late that you and the investment manager had different ideas about what was good for a 52 year old and the consequences may not be pleasant.

 

 

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Not Too Hot

By Larry Luxenberg  

Most investors worry about their portfolio performance when it’s dreadful. It’s also a good time to worry when performance has been very good.

Why worry when performance has been a lot better than the overall stock market? Isn’t that a time to celebrate and not worry for a change?

It may be that celebration is in order. It may be that you are a genius who’s picks have proven that you are superior to most of mankind. It may be that you have picked one of the truly great money managers.

It’s also possible that you have lucked into a good investment or your style is in favor.

More likely you are taking too much risk. Risk can show up in a wide dispersion of returns. That means sometimes the returns are very very good and sometimes those returns are very very bad.

With good reason, most of us are like Goldilocks. We want our porridge not too hot and not too cold. We want it just right.

Investment returns that are too hot can turn too cold quickly and oftentimes that leads to disastrous results.

Worrying about returns that are too good can save lots of tears later on.

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Nothing to Fear

By Larry Luxenberg  

In the midst of the Great Depression, Franklin Roosevelt  addressed the fear that was paralyzing America. In his first inaugural address, Roosevelt said that “We have nothing to fear but fear itself.”

There actually was a lot to fear. The economy was in terrible shape, people were dying and lives were ruined. But action was needed and fear got in the way of taking steps to improve people’s prospects.

Often, in less dramatic ways, I find investors’ fears preventing them from taking prudent risks that would improve the lives of themselves and their families.

The fear of a small loss prevents them from seeking a big gain. Even the near certainty of a large loss over several decades prevents them from taking action that has the high probability of generating at least some gain and most likely a big gain.

People have been so programmed about what is “conservative” investing that they aren’t open to taking a rational look at the data and adjusting their investments accordingly.

While Roosevelt has long since been consigned to the history books, the shadow of the Great Depression and the subsequent stock market crash still looms large in investors’ psyches.

We will regularly see large drops in the stock market and inevitably a crash from time to time but that is something to plan for, not something to relegate us to the sidelines forever.

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The Patriots Are Not the Greatest

By Larry Luxenberg  

The New England Patriots may very well be the greatest pro football dynasty of all time but one area where they don’t excel is in their impact on the stock market.

A Super Bowl Indicator developed decades ago holds that if an American Football Conference team wins the Super Bowl, the stock market will decline that calendar year. If a National Football Conference team or former NFL team, wins, the stock market will go up.

Despite this indicator having no actual basis in anything that should influence investor behavior or actual stock market returns, it has been surprisingly accurate in the half century since the first Super Bowl. In fact, it’s worked nearly 80 percent of the time or 4 out of 5 years. You’ll be hard pressed to find a more accurate stock market indicator.

As an AFC team, the Pats are bad for the stock market. But they have also been bad for the indicator, accounting for nearly half of the misses. Overall, though, the Pats haven’t busted the indicator but they have been mediocre for the market. In the five times before this year that the Pats won the Super Bowl, the market has gone up four times. But the one year it went down, 2002, lowered the overall average return to +3.38 for the S&P 500. While that’s a positive return, it’s still less than half of the S&P’s average return of 10 percent over the close to century for which we have accurate returns.

Surprisingly, in the years when the Pats lost, the market has averaged an even lower return of +2.01 percent. Two years have really hurt their returns. In 2008, when the Pats lost to the Giants by 17-14 in Arizona, the market dropped 37 percent. In a wining Pats year, 2002, the market dropped 22.1 percent after the Pats beat the then St. Louis Rams 20-17.

Excluding the two big losing years, the market has returned an above average 11.05 in the eight other years the Pats have appeared in the big game.

The conclusion for this year: the market is already off to a good start but may go up or down for reasons that are far removed from Brady and Belichick. While all of this may seem overly whimsical when big money and people’s lives are at stake, most American market participants do take their pro football seriously. And while there is no reason to assign any cause and effect to the Super Bowl Indicator, people move billions of dollars every day on flimsier evidence than this.

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A Great Casino

By Larry Luxenberg  

After one of the worst endings to a year in stock market history, it’s easy to despair and bash the market. When the stock market is collapsing, it’s hard to take the long view and be optimistic. But if you do, you’ll soon realize that the U.S. stock market is generally a friend to investors.

We have good data on the U.S. stock market since 1926. For those 92 years, including 2018, the stock market has been negative for a calendar year only 25 times. That’s using the Standard and Poor’s 500 as a measure for the stock market and including dividends. Of those 25 negative years, 15 years, including 2018, had losses of 10 percent or less. In 6 of those years, the market declined by less than 5 percent. In only 3 of the 92 years has the S&P declined by 30 percent or more. Only 4 times has the market declined for a second consecutive year.

The 4 bad times — with two or more consecutive years of losses — were during the Great Depression (1929 to 1932), the start of World War II (1939-41), the deep recession in the 70s after the Arab Oil Embargo and Watergate (1973-74) and the recession and tech collapse around 9/11 (2000 to 2002).

Other than those 4 times, the broad market has never had two or more straight declines. Of the 92 years, we’ve had 67 positive years or 73 percent of the time.

Following the most recent financial crisis, in 2009, after the Great Recession, the year started terribly, down more than 20 percent in the first few months but ended up by 26.5 percent. In 1987 following the crash that included the single worst day in U.S. stock market history, the market closed the year up by 5.2 percent.

Most people think of the stock market as a casino. But if you are a long-term investor, over the last century, you are the house and 3 out of 4 years, you are a winner, often by a large amount. I like those odds. Over the course of my 36 year investment career, the Dow Jones Industrial Average has gone from 800 to more than 23,000 as of year-end 2018. If you ask me, that’s a great casino and no cause for alarm just because of the recent unpleasantness.

 

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Paying for a Child’s Retirement for the Price of a Car

By Larry Luxenberg  

One of the best presents you can give a child is to fund their retirement. And it costs about the same as a modest car. The key to the gift is time. Having a long time to invest is critical but it costs you nothing but patience.

First let me explain how this works and then the four ways it could go wrong.

The initial step is to fund a Roth IRA. A child must have earned income but you can contribute an equivalent sum up to $5,500 a year to the child’s Roth. A Roth provides no deduction on the way in but if you hold it until age 59 1/2, there’s no tax on the way out. A $5,000 contribution to a Roth at age 20 and invested 100 percent in a diversified stock fund, earning the long-term return of stocks, would be worth $587,000 at age 70.

This sounds too easy so what could go wrong?

First, Congress could change the law so that the withdrawal would be taxed.

Secondly, inflation could eat up some or all of the returns. At the 3 percent inflation which has been the U.S. average in recent years, inflation would drive down the purchasing power by a third. Still, it would be a nice bundle to have in retirement.

Third, stocks could have disappointing returns. The longer one owns a diversified fund of stocks, the more likely that returns will be good but there are no guarantees in the stock market.

Finally, the child could mess things up in a variety of ways: invade the account early, change the investing approach or some other, unanticipated way.

Still, for the price of a regular car or less than a full semester at a good college, a parent could prepay a child’s entire retirement. An interesting idea and one I believe in strongly enough to try it.

 

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