Given January’s volatility, let’s recap what actually happened, in terms of return. Looking across broad domestic stock and bond indices, intermediate bonds, as measured by BLV, led the month, up 2%. Short term bonds, as measured by BSV, were up 0.8%.
India’s Sensex was off 4.2%, the S&P 500 was off 5%, the Dow was off 5.5%, the Wilshire 5000 was off 5.9%, and the NASDAQ Composite was off 7.8%. Turning to international markets, Japan’s Nikkei 225 was off 8%, Germany’s DAX was off 8.8%, the Hang Seng was off 10%, and London’s FTSE was off 20.2%. That summarizes January. This temporary downswing only matters though, if your cash reserves were invested in the stock market, and you need those funds this week.
In August and September of 2015, and again in January, the stock market crossed the 10% correction threshold. Last fall, many sectors and securities performed significantly worse. The question on many minds is, is this a repeat of the tech bust of 2001, or of the general market meltdown in 2008-09? And, how do I protect myself from these episodes, after I promised myself I wouldn’t let that happen again? Have you thought along those lines?
The invincibility we felt when the Fed was pumping billions of dollars into the economy is gone. And, we see slow growth domestically, China’s fuzzy accounting coming home to roost, Brazil in a mess, and the ongoing economic malaise in Europe.
So, what to do? We have found that, by far the best solution is to know a couple of things. One is why you are investing. What’s the plan? Where are you headed? What do you expect this money to be doing for you? Answering those questions is critical. The second piece of the equation is to, as many philosophers have suggested, be acquainted with yourself. How much volatility, meaning day to day or month to month (depending on how frequently you look) up and down movement are you really prepared for?
Practically speaking, your portfolio should be aligned with your tolerance for volatility. This is a quant exercise, based on decades of market and behavioral research and testing. If you are a client, you know that we recently updated our risk tolerance profiles, and made portfolio adjustments based on those results.
The lower your temperament and appetite for volatility, the higher the percentage of cash and bonds you should have in your portfolio. While a high percentage of cash and bonds risks purchasing power parity, this approach is appropriate for those for whom asset stability is paramount, and who have significant asset and cash flow margin.
If the need or desire is primarily asset growth, then a 100% equity portfolio, or something close to it, is ideal. Know however, that this approach will incur meaningful volatility. This works well when there is a five or ten year or longer time horizon, solid reserves, and good cash flow margin.
Is your tolerance for volatility higher after a fifteen or fifty month bull run, than it is after two or three difficult quarters? We have found, based on testing, that the answer is yes. This is a phenomenon known in behavioral finance circles as recency bias. That is, we believe that our most recent experiences will replicate themselves repeatedly into the future. This applies across all disciplines of life. In the financial realm, it means that at any given moment, we tend to believe that we will be either paupers or multi-billionaires, depending on recent results.
So how do we manage our own emotions in all of this? From a practical perspective, be diligent with the five basics of handling cash flow – spend less than you make, have a reserve, be careful with debt, have and implement long term plans, and be generous. Philosophically, maintain perspective.
Ellen accomplished this perspective through a recent trip to Myanmar and South Africa. During the trip, she was able to talk to some of the locals who waited on her and her travel mates, and to hear their stories. Ellen said she was completely impressed with what many of these locals did, each day, simply to have food for themselves and their families. While I’ve changed Ellen’s name for this story, the story is real, as is Ellen’s appreciation for her life and its gifts, market volatility or not.
In business news, Pfizer and Allergan have announced a merger. While Allergan has operations in the states, it is an Ireland based company. Some suggest this merger had as an ulterior motive an inversion, allowing Pfizer to enjoy corporate taxation in Ireland, instead of the States. While all of this is a political football, I believe U.S. politicians would be well served realizing we all operate on a global business stage. Amercia would be best served by having our economic and tax policies reflect this reality.
GoNow Doctors, traded on the NASDAQ under the symbol GNOW, moved to Midtown Atlanta from Dallas in December 2014. GoNow plans to grow its chain of 14 urgent-care centers to 90 by the end of 2017, primarily through aggressive acquisition. Most of its recent $7.5 million funding round will go toward its acquisition of Medac Health Services, a chain of four North Carolina urgent-care centers.
A few tips about life and work from those who are qualified to speak to the issue: Warren Buffett “You follow your passions. You find something you love. The truth is, so few people really jump on their jobs, you really will stand out more than you think. You will get noticed if you really go for it.”
Jeffrey Katzenberg “I don’t think it matters how small or how big the task is, if you can do it just a little bit better than what is expected, you will be noticed and rewarded.” Keith Wandell “Just try to stay true to your values and principles.”
If you aren’t familiar with these names, look them up.
Quote of the week:
“In the end, we love people into belief. We don’t argue them into belief.” – Tim Keller
Randy Brunson is the founding shareholder of Centurion Advisory Group. Mr. Brunson
has invested most of his thirty five year career in the area of financial services.