Escalator Up, Elevator Down

By Aaron CFP®, Managing Director

“Escalator up, Elevator down” is a good metaphor to describe movements in the stock markets.

On September 20, 2018 the S&P 500 Index peaked at 2930.  The index gained approximately 17% over the previous 12-month period.   It took only three months to wipe out that gain.

We can sometimes forget that stock markets are volatile (as described in detail in our October 30, 2018 post That Was Fast! by Stephen Greco, CEO).  2018 was an average year for volatility but it seemed worse because 2017 was unusually calm.  The standard deviation (a measurement of volatility, for those of us who didn’t fall asleep in statistics class) for the S&P 500 Index from 1926 – 2017 is 18.7%;[1]  in 2017 it was a mere 6.7%.[2]

It can be a challenge for us to ignore short-term fluctuations with around-the-clock investment news but it is important to keep your focus on long-term results.  Speak with your Wealth Manager about how volatility affects your investment portfolio and your long-term financial plan.

 

 

[1] See: DST Systems Inc. (n.d.). Evaluating Investment Risk at http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088

[2] See: Forbes (December 12, 2018). Market Volatility: A Return To The Old Normal at https://www.forbes.com/sites/sarahhansen/2018/12/12/market-volatility/#4e346efd71f0

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

By Aaron CFP®, Managing Director

“Escalator up, Elevator down” is a good metaphor to describe movements in the stock markets.

On September 20, 2018 the S&P 500 Index peaked at 2930.  The index gained approximately 17% over the previous 12-month period.   It took only three months to wipe out that gain.

We can sometimes forget that stock markets are volatile (as described in detail in our October 30, 2018 post That Was Fast! by Stephen Greco, CEO).  2018 was an average year for volatility but it seemed worse because 2017 was unusually calm.  The standard deviation (a measurement of volatility, for those of us who didn’t fall asleep in statistics class) for the S&P 500 Index from 1926 – 2017 is 18.7%;[1]  in 2017 it was a mere 6.7%.[2]

It can be a challenge for us to ignore short-term fluctuations with around-the-clock investment news but it is important to keep your focus on long-term results.  Speak with your Wealth Manager about how volatility affects your investment portfolio and your long-term financial plan.

 

 

[1] See: DST Systems Inc. (n.d.). Evaluating Investment Risk at http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088

[2] See: Forbes (December 12, 2018). Market Volatility: A Return To The Old Normal at https://www.forbes.com/sites/sarahhansen/2018/12/12/market-volatility/#4e346efd71f0

Aaron Kirsch CFP®, Managing Director

Avoid These Tax Scams

By Aaron CFP®, Managing Director

According to the IRS, thousands of people have lost millions of dollars to tax scams, but you don’t have to be a victim.  There is plenty of information on the IRS website (www.irs.gov) that can help you avoid these scams.  Here are four of the IRS “Dirty Dozen” tax scams for 2018 that you, your family, and your friends should know about:

Phishing

This scam involves fake emails or websites in which criminals attempt to steal personal information. Scam emails and websites can also infect a taxpayer’s computer with malware. Avoid opening emails or clicking on web links claiming to be from the IRS.

The IRS does not initiate contact with taxpayers via email about a bill or tax refund.  Do not click on links or download attachments from unknown or suspicious emails.

Phone Scams

The IRS has seen a surge of phone calls by criminals impersonating IRS agents who threaten taxpayers with police arrest, deportation, license revocation, and other penalties.  They demand cash through a wire transfer, prepaid debit card, or gift card.

The IRS does not initiate contact with taxpayers via phone and never calls to demand immediate payment using a specific payment method.  The IRS typically will first mail a bill to any taxpayer who owes taxes.  The IRS does not threaten to bring in law enforcement to arrest you for not paying.  The IRS cannot revoke your driver’s license, business license, or immigration status.

Identity Theft

Taxpayers need to watch out for identity theft at all times, and during tax time when some criminals file fraudulent returns using someone else’s Social Security number.

Always use security software on your computer with firewall and anti-virus protections, and use strong passwords.  Learn to recognize and avoid phishing emails, threatening phone calls, and texts from thieves posing as legitimate organizations such as a bank, credit card company, or government organization (including the IRS).

Fake Charities

There are groups masquerading as charitable organizations that solicit donations from unsuspecting contributors.  Many of these fake “charities” use names similar to familiar or nationally-known organizations.

Take a few minutes to research an organization to ensure your hard-earned money goes to legitimate charities. The IRS website has tools to check out the status of charitable organizations.

For More Information

See the article “IRS wraps up ‘Dirty Dozen’ list of tax scams for 2018; Encourages taxpayers to remain vigilant”
https://www.irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

By Aaron CFP®, Managing Director

According to the IRS, thousands of people have lost millions of dollars to tax scams, but you don’t have to be a victim.  There is plenty of information on the IRS website (www.irs.gov) that can help you avoid these scams.  Here are four of the IRS “Dirty Dozen” tax scams for 2018 that you, your family, and your friends should know about:

Phishing

This scam involves fake emails or websites in which criminals attempt to steal personal information. Scam emails and websites can also infect a taxpayer’s computer with malware. Avoid opening emails or clicking on web links claiming to be from the IRS.

The IRS does not initiate contact with taxpayers via email about a bill or tax refund.  Do not click on links or download attachments from unknown or suspicious emails.

Phone Scams

The IRS has seen a surge of phone calls by criminals impersonating IRS agents who threaten taxpayers with police arrest, deportation, license revocation, and other penalties.  They demand cash through a wire transfer, prepaid debit card, or gift card.

The IRS does not initiate contact with taxpayers via phone and never calls to demand immediate payment using a specific payment method.  The IRS typically will first mail a bill to any taxpayer who owes taxes.  The IRS does not threaten to bring in law enforcement to arrest you for not paying.  The IRS cannot revoke your driver’s license, business license, or immigration status.

Identity Theft

Taxpayers need to watch out for identity theft at all times, and during tax time when some criminals file fraudulent returns using someone else’s Social Security number.

Always use security software on your computer with firewall and anti-virus protections, and use strong passwords.  Learn to recognize and avoid phishing emails, threatening phone calls, and texts from thieves posing as legitimate organizations such as a bank, credit card company, or government organization (including the IRS).

Fake Charities

There are groups masquerading as charitable organizations that solicit donations from unsuspecting contributors.  Many of these fake “charities” use names similar to familiar or nationally-known organizations.

Take a few minutes to research an organization to ensure your hard-earned money goes to legitimate charities. The IRS website has tools to check out the status of charitable organizations.

For More Information

See the article “IRS wraps up ‘Dirty Dozen’ list of tax scams for 2018; Encourages taxpayers to remain vigilant”
https://www.irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant

Aaron Kirsch CFP®, Managing Director

Why You Should Never Write A Check To Your Favorite Charity

By Aaron CFP®, Managing Director

Don’t Write That Check

We all have our favorite charities and some of us are fortunate enough to support those charities financially. Because of certain rules in the tax code there are typically better alternatives than writing a large check. Let’s look at two specific strategies.

Gifting Stock

Gifting stock that you have owned for more than one year and that has gone up in value is a great way to avoid capital gains taxes and support a non-profit organization. And if you itemize deductions you can take a charitable deduction for the stock’s fair market value on the day you give it away.

Let’s say you bought a stock for $4,000 ten years ago and it’s now worth $10,000. If you sold that stock and paid 20% Federal capital gains tax on the $6,000 of gain your tax would be $1,200. You would receive $10,000 from the sale of the stock, minus $1,200 in capital gain taxes, netting you $8,800 which you could then donate to your favorite charity. But if you gifted that stock to the charity then the charity, being a not-for-profit organization that does not pay taxes, would sell the stock and net $10,000 in proceeds from the sale. Neither you nor the charity would pay capital gains tax. That’s $1,200 more to your favorite charity. That makes a lot more sense than just writing a check, doesn’t it?

Donating Directly From Your IRA

If you donate to charitable organizations and are taking required distributions from your Individual Retirement Account, you should consider making donations directly from your IRA.

The tax law passed by Congress in 2017 doubles the standard deduction and limits itemized deductions for state and local property taxes to $10,000 (which affects many taxpayers in states with high property taxes and state taxes). This means that you may not be itemizing your deductions in 2018 and therefore not receive any deductions for your charitable contributions.

A “Qualified Charitable Distribution” allows anyone who is 70 ½ or older to donate money directly from an IRA to a charitable organization without that gift counting as income (up to $100,000 per year). Any money you transfer through a Qualified Charitable Distribution counts towards your required minimum distribution (the charity must cash the check by December 31).

For example, a client could make an annual gift to his or her alma mater directly from an IRA. Or a couple who donates regularly to their church could set up monthly distributions directly from an IRA. That way, instead of taking money out of the IRA and paying taxes before making the donation, they can send the funds directly to their favorite charities without having to pay taxes on an IRA distribution.

Another benefit of a Qualified Charitable Distribution is that it reduces your Adjusted Gross Income (AGI) which determines how much of your Social Security is subject to income taxes and determines the amount of your Medicare premiums in the following year.

Conclusion

There may be better ways than writing checks to support your favorite charity. Consider gifting stock and making donations directly from your IRA. Please contact your Wealth Advisor at Spotlight Asset Group or consult with your accountant to discuss these and other charitable giving strategies.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Aaron Kirsch CFP®, Managing Director

Join the Spotlight Asset Group Newsletter

By Aaron CFP®, Managing Director

Don’t Write That Check

We all have our favorite charities and some of us are fortunate enough to support those charities financially. Because of certain rules in the tax code there are typically better alternatives than writing a large check. Let’s look at two specific strategies.

Gifting Stock

Gifting stock that you have owned for more than one year and that has gone up in value is a great way to avoid capital gains taxes and support a non-profit organization. And if you itemize deductions you can take a charitable deduction for the stock’s fair market value on the day you give it away.

Let’s say you bought a stock for $4,000 ten years ago and it’s now worth $10,000. If you sold that stock and paid 20% Federal capital gains tax on the $6,000 of gain your tax would be $1,200. You would receive $10,000 from the sale of the stock, minus $1,200 in capital gain taxes, netting you $8,800 which you could then donate to your favorite charity. But if you gifted that stock to the charity then the charity, being a not-for-profit organization that does not pay taxes, would sell the stock and net $10,000 in proceeds from the sale. Neither you nor the charity would pay capital gains tax. That’s $1,200 more to your favorite charity. That makes a lot more sense than just writing a check, doesn’t it?

Donating Directly From Your IRA

If you donate to charitable organizations and are taking required distributions from your Individual Retirement Account, you should consider making donations directly from your IRA.

The tax law passed by Congress in 2017 doubles the standard deduction and limits itemized deductions for state and local property taxes to $10,000 (which affects many taxpayers in states with high property taxes and state taxes). This means that you may not be itemizing your deductions in 2018 and therefore not receive any deductions for your charitable contributions.

A “Qualified Charitable Distribution” allows anyone who is 70 ½ or older to donate money directly from an IRA to a charitable organization without that gift counting as income (up to $100,000 per year). Any money you transfer through a Qualified Charitable Distribution counts towards your required minimum distribution (the charity must cash the check by December 31).

For example, a client could make an annual gift to his or her alma mater directly from an IRA. Or a couple who donates regularly to their church could set up monthly distributions directly from an IRA. That way, instead of taking money out of the IRA and paying taxes before making the donation, they can send the funds directly to their favorite charities without having to pay taxes on an IRA distribution.

Another benefit of a Qualified Charitable Distribution is that it reduces your Adjusted Gross Income (AGI) which determines how much of your Social Security is subject to income taxes and determines the amount of your Medicare premiums in the following year.

Conclusion

There may be better ways than writing checks to support your favorite charity. Consider gifting stock and making donations directly from your IRA. Please contact your Wealth Advisor at Spotlight Asset Group or consult with your accountant to discuss these and other charitable giving strategies.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Aaron Kirsch CFP®, Managing Director

That Was Fast!

By Stephen Greco, CEO

That Was Fast!

As October began, we found ourselves enjoying a steady diet of great economic news and a market that was up for the year. What a difference a few weeks makes. Over the last four weeks, essentially every major asset class is down, including bonds, US stocks, and international stocks. Specifically, the S&P 500 is down 8.4%, small-cap stocks are down 12.2%, the Nasdaq is down 10.3%, emerging markets (EEM) are down 10.2%, and international developed markets (EFA) are down 10.9%. We have also seen individual stocks like Amazon (AMZN) and Netflix (NFLX) correct 20% and 30%, respectively, from all-time highs reached earlier this year. Volatility has increased significantly as well, with the VIX (a measure of volatility in the market) opening at 11.99 on October 1st and now sitting at 24.16, essentially doubling in about a month. While the market has had a significant downturn over the last few weeks, we don’t feel it will turn into a recession.

Why is this happening? A few events have popped up over the past several weeks that have driven the market lower.

Interest rates have increased dramatically relative to the last several years.

The average rate on a 30-year mortgage has risen above 5%, a key psychological level, creating some concerns over a possible slowdown in the housing market. In fact, the housing market continued to deteriorate as sales of new homes plunged to near their lowest level in two years. The Commerce Department reported that new-home sales ran at a seasonally-adjusted annual rate of 553,000 last month, their lowest rate since December of 2016. September’s reading was 5.5% lower than August, and 13.2% lower than at the same time last year.

Algorithmic and momentum trading exacerbate market swings.

Most of you have probably heard of “black box” or “high frequency” trading, which uses powerful computers to effect huge volumes of stock transactions at extremely high speeds. This type of trading accounts for a significant percentage of all trading in the markets and, as a result, many analysts believe it is a large contributor to the enhanced volatility we see in the market these days. The reason for this is that high frequency trading uses computer-based algorithms to tell an automated trading system when and how to trade based on certain conditions being present. So as soon as a stock or index hits the data point the formula is based on, trades will execute automatically. As this type of trading has proliferated we have seen massive moves in the markets when stocks or indexes breach major technical levels. Below is a chart of the S&P 500. The blue line is the 200-day moving average, which is a widely viewed level for a lot of technical traders. It is also a metric that is used by a lot of computer-based trading systems. As you can see, once the S&P 500 got below the blue line and couldn’t close back above it, you saw a pretty large drop in the index.

SOURCE: thinkorswim® TD Ameritrade, Inc.

SOURCE: thinkorswim® TD Ameritrade, Inc.

An opportune time for profit-taking and deleveraging.

When the markets see increased volatility, positions that are up the most are usually the ones that decrease the most. AMZN and NFLX aren’t dramatically different companies today compared to a couple months ago, yet they have seen massive drops in their stock price. We believe that much of this is a result of profit-taking, deleveraging in the market (i.e. paying off margin balances and reducing overall debt), and companies reducing their estimates to account for some of the new headwinds we have seen in the market.

Going forward, as I stated earlier we don’t expect these conditions to develop into the next recession. The economy is actually very strong with some of the highest GDP numbers in years and unemployment being at record lows.

While it is never fun to deal with downturns, they are a normal part of the economic cycle. As you can see in the chart below, markets typically see a decline of 10% or more in most calendar years. Even when the market ends positive for the year, there is usually a downturn at some point.

What isn’t normal, relative to recent history, is the volatility we have seen of late. It used to take months for a market to correct 10%, now it takes weeks or days. We think this volatility is going to stick around for a while, so be prepared. The Federal Reserve has removed most of its stimulus, essentially taking off the market’s training wheels. Anyone with young children knows that, when this happens, very rarely does your child ride off into the sunset on their first try. But after a few falls and some bumps and bruises, they eventually figure it out. We think this is a good analogy for where the market is right now and where it is heading over the next few months. It may be a rough ride with some bumps and bruises to come, but eventually the market will figure it out.

If you have any questions regarding your specific situation or portfolio, please don’t hesitate to contact myself or your Wealth Manager.

Stephen Greco, CEO

Join the Spotlight Asset Group Newsletter

By Stephen Greco, CEO

That Was Fast!

As October began, we found ourselves enjoying a steady diet of great economic news and a market that was up for the year. What a difference a few weeks makes. Over the last four weeks, essentially every major asset class is down, including bonds, US stocks, and international stocks. Specifically, the S&P 500 is down 8.4%, small-cap stocks are down 12.2%, the Nasdaq is down 10.3%, emerging markets (EEM) are down 10.2%, and international developed markets (EFA) are down 10.9%. We have also seen individual stocks like Amazon (AMZN) and Netflix (NFLX) correct 20% and 30%, respectively, from all-time highs reached earlier this year. Volatility has increased significantly as well, with the VIX (a measure of volatility in the market) opening at 11.99 on October 1st and now sitting at 24.16, essentially doubling in about a month. While the market has had a significant downturn over the last few weeks, we don’t feel it will turn into a recession.

Why is this happening? A few events have popped up over the past several weeks that have driven the market lower.

Interest rates have increased dramatically relative to the last several years.

The average rate on a 30-year mortgage has risen above 5%, a key psychological level, creating some concerns over a possible slowdown in the housing market. In fact, the housing market continued to deteriorate as sales of new homes plunged to near their lowest level in two years. The Commerce Department reported that new-home sales ran at a seasonally-adjusted annual rate of 553,000 last month, their lowest rate since December of 2016. September’s reading was 5.5% lower than August, and 13.2% lower than at the same time last year.

Algorithmic and momentum trading exacerbate market swings.

Most of you have probably heard of “black box” or “high frequency” trading, which uses powerful computers to effect huge volumes of stock transactions at extremely high speeds. This type of trading accounts for a significant percentage of all trading in the markets and, as a result, many analysts believe it is a large contributor to the enhanced volatility we see in the market these days. The reason for this is that high frequency trading uses computer-based algorithms to tell an automated trading system when and how to trade based on certain conditions being present. So as soon as a stock or index hits the data point the formula is based on, trades will execute automatically. As this type of trading has proliferated we have seen massive moves in the markets when stocks or indexes breach major technical levels. Below is a chart of the S&P 500. The blue line is the 200-day moving average, which is a widely viewed level for a lot of technical traders. It is also a metric that is used by a lot of computer-based trading systems. As you can see, once the S&P 500 got below the blue line and couldn’t close back above it, you saw a pretty large drop in the index.

SOURCE: thinkorswim® TD Ameritrade, Inc.

SOURCE: thinkorswim® TD Ameritrade, Inc.

An opportune time for profit-taking and deleveraging.

When the markets see increased volatility, positions that are up the most are usually the ones that decrease the most. AMZN and NFLX aren’t dramatically different companies today compared to a couple months ago, yet they have seen massive drops in their stock price. We believe that much of this is a result of profit-taking, deleveraging in the market (i.e. paying off margin balances and reducing overall debt), and companies reducing their estimates to account for some of the new headwinds we have seen in the market.

Going forward, as I stated earlier we don’t expect these conditions to develop into the next recession. The economy is actually very strong with some of the highest GDP numbers in years and unemployment being at record lows.

While it is never fun to deal with downturns, they are a normal part of the economic cycle. As you can see in the chart below, markets typically see a decline of 10% or more in most calendar years. Even when the market ends positive for the year, there is usually a downturn at some point.

What isn’t normal, relative to recent history, is the volatility we have seen of late. It used to take months for a market to correct 10%, now it takes weeks or days. We think this volatility is going to stick around for a while, so be prepared. The Federal Reserve has removed most of its stimulus, essentially taking off the market’s training wheels. Anyone with young children knows that, when this happens, very rarely does your child ride off into the sunset on their first try. But after a few falls and some bumps and bruises, they eventually figure it out. We think this is a good analogy for where the market is right now and where it is heading over the next few months. It may be a rough ride with some bumps and bruises to come, but eventually the market will figure it out.

If you have any questions regarding your specific situation or portfolio, please don’t hesitate to contact myself or your Wealth Manager.

Are You Living Your Life On Purpose?

Aaron Kirsch, Managing Director

Are You Living Your Life On Purpose?

Why do you do what you do?

Is it because

  • you have to?
  • you want to?
  • you’ve had the same routine for years?

If you feel like life is something that just happens to you, it’s time to reassess how you are spending your time. Financial security, stability, and creature comforts are all important, but feeling that your life has purpose is critical to your emotional and physical well-being.

A healthy sense of purpose

Research into the area of human well-being draws a distinction between happiness (experiencing pleasure and avoiding pain) and the Are You Living Your Life on Purposefeelings of meaning and self-worth that we derive from our lives (1).  Too often we focus on the former and neglect the latter. This is why the sheen wears off so quickly from a big-ticket purchase. Buying a new car or big-screen TV gives us a quick hit of pleasure. But sooner rather than later new things become just more things that we’ve accumulated. Once that initial happiness evaporates we find there’s no additional layer – no purpose – to improve our well-being.

A doctor who has to deal with ill people and mortality might not consider her job “happy” all the time. But helping people gives her that critical sense of purpose that rounds out her feelings of well-being.

Researchers have found that people who feel their lives have purpose live longer and show decreased risk of cardiovascular problems (2), and cognitive problems such as Alzheimer’s (3).

The purpose of work and family

Most of us tie purpose to the things that we spend the majority of our time doing: working and raising our families. Again it’s important to draw a distinction between simple happiness and purpose. Taking care of children will at times make even the most patient parents want to pull their own hair out. But feelings of love, connection, and responsibility make both happy family vacations and frustrating afternoons in timeout purposeful.

Get your life into alignment

If you feel like your life is lacking purpose, start by looking for misalignment in the areas of happiness and purpose. For those who are still working, is your job “just a job” that pays the bills? How could you pivot to a career that uses your unique gifts and skills to create purpose? Or how can you find purpose in your existing job? Are you working so hard that you’re missing key family events which are also critical to your sense of purpose? Are there ways to improve your work-life balance?

For those who are retired, research indicates that seniors frequently cite “dying with their music still in them” as one of the biggest areas of regret when they look back on their lives (chances they didn’t take, ideas they never pursued, or opportunities they watched pass by). It’s not money they’re regretting. It’s the sense of purpose they missed out on that would have improved their Return on Life.

It’s not too late

It is never too late to find that purpose. Start by asking yourself, “Why do I get out of bed in the morning?”

We encourage you to come in and talk to us so that we can start a new dialogue about how your financial plan can help you get the best, most purposeful life possible with the money you have.

Sources:
1. https://www.ncbi.nlm.nih.gov/pubmed/11148302
2. https://www.ncbi.nlm.nih.gov/pubmed/26630073
3. https://jamanetwork.com/journals/jamapsychiatry/fullarticle/210648

Aaron Kirsch, Managing Director

Join the Spotlight Asset Group Newsletter

Aaron Kirsch, Managing Director

Are You Living Your Life On Purpose?

Why do you do what you do?

Is it because

  • you have to?
  • you want to?
  • you’ve had the same routine for years?

If you feel like life is something that just happens to you, it’s time to reassess how you are spending your time. Financial security, stability, and creature comforts are all important, but feeling that your life has purpose is critical to your emotional and physical well-being.

A healthy sense of purpose

Research into the area of human well-being draws a distinction between happiness (experiencing pleasure and avoiding pain) and the Are You Living Your Life on Purposefeelings of meaning and self-worth that we derive from our lives (1).  Too often we focus on the former and neglect the latter. This is why the sheen wears off so quickly from a big-ticket purchase. Buying a new car or big-screen TV gives us a quick hit of pleasure. But sooner rather than later new things become just more things that we’ve accumulated. Once that initial happiness evaporates we find there’s no additional layer – no purpose – to improve our well-being.

A doctor who has to deal with ill people and mortality might not consider her job “happy” all the time. But helping people gives her that critical sense of purpose that rounds out her feelings of well-being.

Researchers have found that people who feel their lives have purpose live longer and show decreased risk of cardiovascular problems (2), and cognitive problems such as Alzheimer’s (3).

The purpose of work and family

Most of us tie purpose to the things that we spend the majority of our time doing: working and raising our families. Again it’s important to draw a distinction between simple happiness and purpose. Taking care of children will at times make even the most patient parents want to pull their own hair out. But feelings of love, connection, and responsibility make both happy family vacations and frustrating afternoons in timeout purposeful.

Get your life into alignment

If you feel like your life is lacking purpose, start by looking for misalignment in the areas of happiness and purpose. For those who are still working, is your job “just a job” that pays the bills? How could you pivot to a career that uses your unique gifts and skills to create purpose? Or how can you find purpose in your existing job? Are you working so hard that you’re missing key family events which are also critical to your sense of purpose? Are there ways to improve your work-life balance?

For those who are retired, research indicates that seniors frequently cite “dying with their music still in them” as one of the biggest areas of regret when they look back on their lives (chances they didn’t take, ideas they never pursued, or opportunities they watched pass by). It’s not money they’re regretting. It’s the sense of purpose they missed out on that would have improved their Return on Life.

It’s not too late

It is never too late to find that purpose. Start by asking yourself, “Why do I get out of bed in the morning?”

We encourage you to come in and talk to us so that we can start a new dialogue about how your financial plan can help you get the best, most purposeful life possible with the money you have.

Sources:
1. https://www.ncbi.nlm.nih.gov/pubmed/11148302
2. https://www.ncbi.nlm.nih.gov/pubmed/26630073
3. https://jamanetwork.com/journals/jamapsychiatry/fullarticle/210648

Aaron Kirsch, Managing Director

The Siren Song of Emerging Markets

By Stephen Greco, CEO

The Siren Song of Emerging Markets

Since making the transition from the broker-dealer side of the industry to the registered investment adviser side, around 2011, no asset class has been more interesting to me than Emerging Markets. By 2011, many investment advisers had fallen in love with Emerging Markets as an asset class and decided to pile significant portions of their clients’ portfolios into this space. Some advisers had well-thought-out arguments that pointed to population growth in these markets, a growing middle class, exceptional performance from 2001 to 2010, and an increased risk premium as factors that should lead to higher returns over an extended period. Other advisers really didn’t have an argument and instead decided to pile into Emerging Markets because it was the “hot” asset class. Even worse, some advisers applied a lazy “gambler’s fallacy” type of logic and reasoned that, because Emerging Markets had a couple lagging years to start the decade, they needed to buy more since it was due to bounce back. “Buy low, it has to come back at some point” is a common refrain I have heard over the years, which really is no different than saying you should bet on black in roulette after red has come up 6 or 7 times in a row. I even saw an article the other day, written by a member of the investment committee of a prominent firm, that stated that investors need to have exposure to foreign stocks, even though they won’t lead to the highest returns. Such advice is emblematic of the “follow the crowd” thinking that has unfortunately become so prevalent in the market. Diversify because you are told to do so, and be happy with lower returns. Shouldn’t we strive for something better? Something more strategic and thoughtful?

To set the context for why this is all so fascinating to me, it is important to understand the returns we have seen from Emerging Markets over the last couple of decades. From 12/31/99 to 12/31/09 the S&P 500 had an average annual return of -2.72% per year. It is a period often referred to as the “Lost Decade” for US stocks, and it was the only decade the S&P 500 recorded a negative annual return according to data that Forbes had collected going back to 1926. Emerging Markets, on the other hand, had an average annual return of 9.78% per year during that same period, out-performing the US stock market by about 12.5% per year for 10 years. That is a tremendous difference and, because of that performance, many advisers started to allocate more and more of their client’s portfolios into Emerging Markets, blindly expecting the same types of returns for this current decade. Unfortunately, they have been horribly wrong. From 12/31/09 to 7/31/18, Emerging Markets had an average annual return of 1.59% per year. Not quite negative like the S&P 500 in the previous decade, but certainly nothing to write home about. In contrast, the S&P 500 had an average annual return of 23.55% per year, or about 22% more each year for the last 8+ years. So what changed?

We believe there are three key questions every investment committee should ask to guide their analysis and make better-informed decisions for their clients:

1) What has happened?
2) What is happening?
3) What do we think will happen going forward?

What has happened?

Gambler’s fallacy aside, we do believe in reversion to the mean and we factor it into our thinking when we develop portfolios. This is simply a fancy way of saying that if something hasn’t done well for an extended period then it should be on our radar because asset classes perform in predictable ranges the longer the period you are measuring. Therefore, if something has done poorly for an extended period, it could do much better than other asset classes in the future. After all, money finds value. The mistake many advisers made, in our opinion, was that they saw underperformance in a small period of time (2011, 2013, 2014) and assumed that things would spring back after that. This is even more mind-boggling when we just came off a decade of underperformance for the S&P 500. After all, if the US markets underperformed for an entire decade, why wouldn’t it be logical to assume that Emerging Markets could do the same? This would be a very simple conclusion to draw, and one that would have been right if they simply would have underweighted the asset class based on the previous out-performance alone. However, while we believe in reversion to the mean, we feel more thought needs to go into investment decisions than that alone.

What is happening?

During the current decade there are a few factors we believe have contributed to the underperformance of Emerging Markets. First, as stated above, money finds value. If an asset class underperforms for more than a decade, at some point people will take notice. Second, we had two extensive declines to the market during the previous decade. In the early part of the 2000’s we had the tech bubble followed up by the financial crisis in 2007 and 2008. These shocks to the market impacted the way investors think. It decreased their appetite for risk and encouraged them to invest in things they were more comfortable with and understood. This led people to invest more in their own backyard (i.e. US stocks). Third, there was a significant drop in interest rates in the decade beginning in 2000. The prime rate, which is the interest rate that many loans are based on, started around 9.5% at the beginning of the decade and decreased to around 3.25% by the end of the decade. The Federal Reserve tries to keep rates low to stimulate investing and risk-taking, so this incredible movement in rates really helped prop up Emerging Markets. In the current decade, we have seen an increase in rates from 3.25% to 5.00%. It isn’t a tremendous increase, but the bottom line is that rates have gone up, which hurts the riskier asset classes, including Emerging Markets. Lastly, over the past two years, the Trump administration has emphasized an “America First” approach to, among other things, US trade policy. Specifically, the administration has been aggressively trying to renegotiate trade deals to America’s benefit. This has caused more concern for Emerging Markets, especially in China, which has been singled out as the primary trade offender by the Trump administration. China represents about 30% of the Emerging Markets Index. So, what should investors do? Think about the future.

What do we think will happen going forward?

Now that Emerging Markets has significantly underperformed for the last 8.5 years, we feel it is time for investors to take notice. It isn’t a sign in and of itself that investors should allocate more to Emerging Markets, but it is a step in that direction. We also want to look at P/E ratios compared to historical norms. Currently, the S&P 500 is trading at a P/E ratio of 24.06 based on forward looking metrics (see the Wall Street Journal link, below). Emerging Markets is trading at a P/E ratio of 11.45 based on forward expected earnings as of 7/31/18. While we expect interest rates to continue to rise over the next couple of years, we think the pace of these hikes will slow. Since 2015 we have seen six interest rate increases totaling 1.75%. We expect three more hikes over the next couple of years, which would not be as significant as what we have seen previously. Lastly, we think the political climate is starting to take a turn towards completing trade deals, rather than imposing tariffs. Republicans have been more vocal about tariffs than they have about any other areas of disagreement with the President. Trade is becoming a big issue in several swing districts, and we expect to see the administration work feverishly to get as many deals done as possible before the mid-term elections. We saw that this week with the US and Mexico nearing an agreement on a trade deal. Canada appears to be next, and the administration continues to negotiate with China as well.

Based on these factors, we think it is a good time to allocate more capital to Emerging Markets. Clients have already received a newsletter with our specific trades. For any prospective clients that are interested in our investment philosophy or services, please don’t hesitate to contact me at greco@spotlightassetgroup.com or by phone at 630-230-6840.

Links:

 

Stephen Greco, CEO

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By Stephen Greco, CEO

The Siren Song of Emerging Markets

Since making the transition from the broker-dealer side of the industry to the registered investment adviser side, around 2011, no asset class has been more interesting to me than Emerging Markets. By 2011, many investment advisers had fallen in love with Emerging Markets as an asset class and decided to pile significant portions of their clients’ portfolios into this space. Some advisers had well-thought-out arguments that pointed to population growth in these markets, a growing middle class, exceptional performance from 2001 to 2010, and an increased risk premium as factors that should lead to higher returns over an extended period. Other advisers really didn’t have an argument and instead decided to pile into Emerging Markets because it was the “hot” asset class. Even worse, some advisers applied a lazy “gambler’s fallacy” type of logic and reasoned that, because Emerging Markets had a couple lagging years to start the decade, they needed to buy more since it was due to bounce back. “Buy low, it has to come back at some point” is a common refrain I have heard over the years, which really is no different than saying you should bet on black in roulette after red has come up 6 or 7 times in a row. I even saw an article the other day, written by a member of the investment committee of a prominent firm, that stated that investors need to have exposure to foreign stocks, even though they won’t lead to the highest returns. Such advice is emblematic of the “follow the crowd” thinking that has unfortunately become so prevalent in the market. Diversify because you are told to do so, and be happy with lower returns. Shouldn’t we strive for something better? Something more strategic and thoughtful?

To set the context for why this is all so fascinating to me, it is important to understand the returns we have seen from Emerging Markets over the last couple of decades. From 12/31/99 to 12/31/09 the S&P 500 had an average annual return of -2.72% per year. It is a period often referred to as the “Lost Decade” for US stocks, and it was the only decade the S&P 500 recorded a negative annual return according to data that Forbes had collected going back to 1926. Emerging Markets, on the other hand, had an average annual return of 9.78% per year during that same period, out-performing the US stock market by about 12.5% per year for 10 years. That is a tremendous difference and, because of that performance, many advisers started to allocate more and more of their client’s portfolios into Emerging Markets, blindly expecting the same types of returns for this current decade. Unfortunately, they have been horribly wrong. From 12/31/09 to 7/31/18, Emerging Markets had an average annual return of 1.59% per year. Not quite negative like the S&P 500 in the previous decade, but certainly nothing to write home about. In contrast, the S&P 500 had an average annual return of 23.55% per year, or about 22% more each year for the last 8+ years. So what changed?

We believe there are three key questions every investment committee should ask to guide their analysis and make better-informed decisions for their clients:

1) What has happened?
2) What is happening?
3) What do we think will happen going forward?

What has happened?

Gambler’s fallacy aside, we do believe in reversion to the mean and we factor it into our thinking when we develop portfolios. This is simply a fancy way of saying that if something hasn’t done well for an extended period then it should be on our radar because asset classes perform in predictable ranges the longer the period you are measuring. Therefore, if something has done poorly for an extended period, it could do much better than other asset classes in the future. After all, money finds value. The mistake many advisers made, in our opinion, was that they saw underperformance in a small period of time (2011, 2013, 2014) and assumed that things would spring back after that. This is even more mind-boggling when we just came off a decade of underperformance for the S&P 500. After all, if the US markets underperformed for an entire decade, why wouldn’t it be logical to assume that Emerging Markets could do the same? This would be a very simple conclusion to draw, and one that would have been right if they simply would have underweighted the asset class based on the previous out-performance alone. However, while we believe in reversion to the mean, we feel more thought needs to go into investment decisions than that alone.

What is happening?

During the current decade there are a few factors we believe have contributed to the underperformance of Emerging Markets. First, as stated above, money finds value. If an asset class underperforms for more than a decade, at some point people will take notice. Second, we had two extensive declines to the market during the previous decade. In the early part of the 2000’s we had the tech bubble followed up by the financial crisis in 2007 and 2008. These shocks to the market impacted the way investors think. It decreased their appetite for risk and encouraged them to invest in things they were more comfortable with and understood. This led people to invest more in their own backyard (i.e. US stocks). Third, there was a significant drop in interest rates in the decade beginning in 2000. The prime rate, which is the interest rate that many loans are based on, started around 9.5% at the beginning of the decade and decreased to around 3.25% by the end of the decade. The Federal Reserve tries to keep rates low to stimulate investing and risk-taking, so this incredible movement in rates really helped prop up Emerging Markets. In the current decade, we have seen an increase in rates from 3.25% to 5.00%. It isn’t a tremendous increase, but the bottom line is that rates have gone up, which hurts the riskier asset classes, including Emerging Markets. Lastly, over the past two years, the Trump administration has emphasized an “America First” approach to, among other things, US trade policy. Specifically, the administration has been aggressively trying to renegotiate trade deals to America’s benefit. This has caused more concern for Emerging Markets, especially in China, which has been singled out as the primary trade offender by the Trump administration. China represents about 30% of the Emerging Markets Index. So, what should investors do? Think about the future.

What do we think will happen going forward?

Now that Emerging Markets has significantly underperformed for the last 8.5 years, we feel it is time for investors to take notice. It isn’t a sign in and of itself that investors should allocate more to Emerging Markets, but it is a step in that direction. We also want to look at P/E ratios compared to historical norms. Currently, the S&P 500 is trading at a P/E ratio of 24.06 based on forward looking metrics (see the Wall Street Journal link, below). Emerging Markets is trading at a P/E ratio of 11.45 based on forward expected earnings as of 7/31/18. While we expect interest rates to continue to rise over the next couple of years, we think the pace of these hikes will slow. Since 2015 we have seen six interest rate increases totaling 1.75%. We expect three more hikes over the next couple of years, which would not be as significant as what we have seen previously. Lastly, we think the political climate is starting to take a turn towards completing trade deals, rather than imposing tariffs. Republicans have been more vocal about tariffs than they have about any other areas of disagreement with the President. Trade is becoming a big issue in several swing districts, and we expect to see the administration work feverishly to get as many deals done as possible before the mid-term elections. We saw that this week with the US and Mexico nearing an agreement on a trade deal. Canada appears to be next, and the administration continues to negotiate with China as well.

Based on these factors, we think it is a good time to allocate more capital to Emerging Markets. Clients have already received a newsletter with our specific trades. For any prospective clients that are interested in our investment philosophy or services, please don’t hesitate to contact me at greco@spotlightassetgroup.com or by phone at 630-230-6840.

Links: