A week or so ago, the markets were bouncing along at all time highs and the media was warning us of problems. “The market is over-valued”, “The market is too high.” Sure enough, the market dropped significantly one day but climbed back in the following days. This has been repeated many times over the market’s history. “The market climbs a wall of worry.”
August 2019 Newsletter
WHAT ABOUT RISK?
A week or so ago, the markets were bouncing along at all time highs and the media was warning us of problems. “The market is over-valued”, “The market is too high.” Sure enough, the market dropped significantly one day but climbed back in the following days. This has been repeated many times over the market’s history. “The market climbs a wall of worry.”
We have so much proof of the strength of the stock market. We provide you with the history of dollars you invested, then subtract the dollars you withdrew, equaling the “net invested”. We compare that number to the current market value. For people who have been sticking to our recommended investment program over many years, that comparison is significant. The market has “magically” earned back the money taken out and much more. Sometimes the investor has withdrawn all money invested and the account value is still higher than the original investments. This doesn’t happen …can’t happen, in “low risk” fixed investments like bonds and savings accounts.
And that is the value of risk. While I see advertisements with entreaties to help me “reduce risk in my portfolio,” I do not see reminders that such portfolios will also reduce the rate of return I can possibly earn. I don’t understand why this is allowed by the “watchdog” compliance people.
We should all value risk; it’s why we can earn returns in the high single digits to low double digits over lifetimes of investing in stocks, preferably through mutual funds which do reduce risk through diversification, with limited fixed income. (e.g. S&P 500 annual return approximates 10% since inception in 1926.)
IS THE MARKET TOO HIGH? DOES IT HAVE TO GO DOWN SOON? TWO OVERLOOKED SIGNS.
I wonder how many components make up the market. I am certain we never incorporate all of them on any one day. Certain events are highlighted and many ignored. In the raging bull market of the later ‘90s, which ended in a crushing Bear Market in 2000-2002, investors jumped in believing it would go on forever. There were a couple of economists who told us it could and would. The price to earnings (PE) ratios were soaring far higher than average p/e’s ever had, and yet people continued to rush into the market. But then the market came crashing down and many people lost a great deal of money. It’s important to remember, the market didn’t end.
Stocks, an application available from Apple, gives you the daily average of stocks traded that day and the average historical volume for the day. That daily number bounces between a little less than, and a little more than, the historical average. This is a positive sign that the market is probably not overvalued.
Also under-reported is that investors have been taking money out of equity markets and investing in fixed-income markets. This shows that fear is controlling the investor, not greed, and they do not understand the long term history of fixed vs. equity investments. The “in-between” investor is the patient investor who knows the difference between solid investments and risky investments and carefully chooses equities. Just like the tortoise, he will win the long term race. The fixed-income investor does not understand the long term risk and how much is lost trying to avoid loss.
WHAT ABOUT INTERNATIONAL STOCKS?
International stocks have lagged US Stocks for several years. We have always been international investors, but have more confidence in US these days. We have been reducing the percentage of International Stocks and will continue to do so.
CLIENT REVIEWS
As always, we hope to hear from you, or meet with you from time to time. Please call us to request a meeting whenever is best for you.
SATIATED BY FEDERAL RESERVE HEADLINES?
Nick Murray, a financial professional who we respect, has a great perspective on this topic. Please email us if you would like a copy of his latest commentary.
Sincerely,
Louise Googins, Author, Principal
Karl Kuelthau, Principal
Michael Googins, Administrator
Kim Rankin, Accountant
Carson Bieber, Associate
Mckayla Johnson, UW-Madison Intern