Q2 2016 MARKET SUMMARY


Hello all, here you will find DFA's Market Summary for the second quarter of 2016. I don’t expect you to read the whole deck, but I always try to find a page or two to point out to you, typically it’s the last page, but this time around I honestly couldn’t think of much to say about the last page; instead you should check out page 4.

The quarterly reports always contain this page (which highlight global events against the backdrop of the performance of the MSCI All Country World Index), but I think this time it’s notable for the “Brexit” event we saw less than 3 weeks ago. You’ll see how the market’s reaction was a very sharp move down (and don’t forget stock markets are just made up of people buying and selling stock to and from each other), but you’ll also see the drastic move back up [as I’m writing this email the US stock market as measured by the S&P 500 Index is at an all-time high], this is why it’s imperative we don’t react to ‘the sky is falling’ short-term news when we’re investing for the long-term. And as I always say if we’re investing heavily in stocks then by nature we’re investing for the long-term.

After the Brexit event on June 23, I had no idea if our stocks portfolios would continue to go down in value, stay flat, or sharply rise, but I did know I wasn’t going to panic and I wasn’t going to let one day of stock market movement derail a lifetime’s plan of stock investing for your or my portfolio.

We will be greatly rewarded if we always stay the course in a broadly diversified portfolio and as our appetite for risk/reward changes, then, at that time, is when we react and raise or lower our stock exposure. We decide when to raise or lower our stock exposure, we don’t let others in the market decide for us.

Please contact me with any questions.

THE PRICE YOU PAY FOR TRACKING A MARKET INDEX

When I talk about the DFA mutual funds in which our money is invested I try to explain how they are like index funds, but not really – I admit this can be a confusing answer. First, an index fund can be defined this way…

An index fund is a mutual fund designed to match the components of a market index. Probably the most well-known example would be an index fund that is designed to track the performance of S&P 500 Index. Generally, index funds provide broad market exposure (thus reducing risk), low operating expenses (thus reducing fees) and low portfolio turnover (thus reducing the impact of taxes). In short, the saying “if you can’t beat ‘em, join ‘em” is perfect here.

DFA has released a short article explaining how index funds can be adversely impacted due to their requirement to strictly adhere to tracking a market index. The attached paper explains how DFA funds allow for more buying and selling flexibility than index funds thus reducing their costs to buy and sell, which, in turn, is a cost savings that is passed on to us, the investors in their funds.

I encourage you to give this article a read and to let me know if you have any questions.

MARKET VOLATILITY: WHAT IT IS AND HOW TO HANDLE IT

The stock market has been extremely volatile as of late. Consider August 24, 2015, when the Dow opened down nearly 1,000 points and as of this writing has rebounded nearly 700 points. Volatility is like a roller coaster and today is probably about as wild of a roller coaster for one to be on.

However, never forget that volatility is driven by emotional buying and selling, and investors (not traders), like myself, don’t let our emotions determine our long-term investment strategy for retirement. Part of the reason our clients hire us is to keep their emotions in check, so that they don’t get off of the roller coaster before it comes to a complete stop. The complete stop is when you’re ready to stop investing in the wealth generating tool that is capitalism. Are you at that point today?

Remember, when you invest in the stock market you are lending your money to businesses across the world; in finer detail, you are lending your money to ideas, innovation, advances, technology, people and entrepreneurship – these six elements are at the core of capitalism and over the long-term you will benefit and profit from capitalism and its elements.

Long-term is key here, because today’s wild volatility is still only one day of stock market movement. The stock market is very volatile, but over its extended history it has only moved in one direction – up.

Down markets present opportunities for you to lend your money to capitalism at lower prices than you were previously lending money to it. This isn’t bad news, this is great news. So look at market sell offs or extended periods of down markets, known as bear markets, as great opportunities to buy great companies at great prices. Therefore, we use these times to rebalance our portfolios where we sell some investments and buy others. Over time rebalancing actually gets us to ‘sell high’ and ‘buy low’ which has proven to be a great long-term wealth building strategy.

As for me, I personally feel no different about my retirement portfolio today than I did yesterday because I’m keeping my emotions in check and not letting their short-term effects on me determine my long-term strategy. And I make sure my clients feel the same way.

I’ve come across this great quote several times and from several different people so I don’t know who to credit with it: “I don’t (and no one else knows either ) whether the next 10% move in the market will be up or down, but I can tell you the next 100% market move will be up.” For clients of Pensinger Financial it is our goal to make sure they participate in the next 100% move up, all we ask is that they ride out the 10% (and more) up and down swings with us and don’t let their short-term emotions cause them long-term harm.

"THE RETIREMENT GAMBLE" RESPONSE


Check out this video "The Retirement Gamble" by Martin Smith at Frontline.

This is a very thought provoking and well done documentary by Martin Smith. It touches upon many areas that are at the foundation of taking control of your own retirement and understanding how to invest for your safe and secure financial future while not being misled by big, bloated Wall Street Firms whose seemingly only interest is to gouge you with fees (like the ones seen in the documentary with company representatives stumbling over their words poorly trying to defend what they do).

You're in charge of your retirement, so how do ensure you have a safe and secure financial future

- Live below your means by spending less than you take in.

- Don’t get into credit card debt, pay your credit cards down to zero every single month.

- Keep track of your expenses and know how much of your money is going out the door every month and to where it is going, then build up a savings account with 3 to 6 months’ worth of your living expenses (more if you have dependents).

- Consistently invest in a portfolio of low-cost mutual funds that give you exposure to big, medium, and small sized companies from the US and foreign markets (Vanguard and Dimensional Fund Advisors are two great and investment firms offering low-cost products). To learn more about the benefits of a diversified portfolio see my “Diversification” blog post.

- As the documentary points out FEES MATTER! It’s simple math, the less you pay in fees the more money you make. And why do you invest? To make money. Keep your fees as low as possible, to read more about how fees impact you, click here.

- Embrace the miracle of compounding. When you have several decades until retirement properly investing $50 a month and leaving your investments there to compound over those several decades will get you a very nice nest egg come retirement. Saving and investing is a snowball effect - doing a little bit early on doesn't seem like much, but it will continue grow and you will see the benefits when the snowball keeps rolling. If you're in your 20s I recommend reading this and if you're in your 30s I recommend reading this.

Additional thoughts about this video's content

Yes, fiduciary duty should be extremely important to you. When you hire someone to plan for your financial future it only makes sense that s/he should legally and ethically have your best interests in mind at all times. Pensinger Financial is proud and honored to be in the small minority (15% as the video points out) who have fiduciary duty to their clients.

Don't be afraid to ask your investment advisor "How are you compensated?" Compensation should be as straight forward and as transparent as possible. Your advisor should be able to tell you within 30 seconds how s/he gets paid. We gladly lay it out very simple for our clients and our prospective clients - this is how we are compensated, and nothing more.

You should be investing with a Registered Investment Advisor firm whose advisors are licensed as Investment Advisor Representatives for the simple reason that it is much safer for you and you won't be getting sold. Ask your advisor "Are you licensed to advise or are you licensed to sell?" Hopefully you get an answer like this "I am licensed to _____." That way you know if your advisor is advising you or selling you; if you don't get a straight forward answer, then be very cautious with whom you are dealing.

With regards to 401(k)s there are “so many choices it’s hard to understand.” That’s right, fortunately I understand the choices and provide people with in-depth and detailed 401(k) and 403(b) reviews. In my reviews I assemble a specific portfolio that helps you to understand what you are investing in, why you are doing it, and how much it is costing you. I do this for $250, but mention this blog and I’ll knock $100 off the price. I have done reviews for people where by switching them to less expensive investments what they save on fees more than pays for what I charged them to do the review. As the documentary points out saving on fees now can mean having tens or even hundreds of thousands more dollars come retirement time.

“Fund names tell you nothing.” A good rule of thumb is to look for the word “index” in a fund’s title. This doesn’t guarantee you a low-cost fund, but it does mean you’re in an index fund instead of an actively managed fund. This typically means your costs will be lower, because…FEES MATTER! Consider how the documentary offered this opinion: “the role of actively managed funds in the marketplace is to make fees off of investors.” By definition actively managed funds are designed to generate returns for their investors by picking stocks that beat the market, whereas index funds mimic the returns of the market. Actively managed funds try to beat index funds, but at a significantly higher cost than their counterpart index funds, and the higher costs means less return for you. Over time we’ve seen actively managed funds return about the same as index funds, but the investor gets less of that return in his pocket because of the higher fees he’s paid out to be in that fund.

Sadly, there is a lot of misinformation out there and a lot of bad practices as well. Just recently Edward Jones was fined $20 million dollars for overcharging their clients. That shouldn't happen, but part of the reason that happens is because Edward Jones and similar firms (like JP Morgan Chase in the documentary) are licensed to sell you products and are held to the "suitability standard" of investment advice instead of being licensed to advise you and being held to a fiduciary duty.

There are firms out there that help their clients invest the right way, they do it at a low-cost (because it saves you money and therefore makes you more money), they put your interests ahead of theirs at all times (this is fiduciary duty), and they don't see you a revenue generator, rather they see you as individual or family who wants to be led to a safe and secure retirement. I'm very proud to say, and stand by the fact that Pensinger Financial is one of those firms.

WHO SAYS YOU CAN'T TIME THE STOCK MARKET? WHY MARKET TIMING IS EASY.

At some point every investor, trader, or stock picker has dreamt of buying a stock right before some major news turning him/her into a retired millionaire seemingly overnight.

It’s fair to think that way, and I’ve done it myself several times. After all we buy stocks to see our investments go up in value. So wouldn't it be great to buy stocks before the market goes up? This is called market timing. Others might tell you it's impossible to time the market. Well, it's actually pretty easy to do. Click here to find out how.