The main theme for Q1 has been market volatility and what we can do to counteract its impact on us. The final page of the Q1, 2018 quarterly report makes a good analogy about how embarking on your financial plan is like sailing around the world. Your voyage won’t always go as planned, and you’re sure to come across rough seas at times (in the form of market volatility and personal ups and downs), but the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-advised. We like to say: “if you fail to plan, you plan to fail.”
WITH MARKET VOLATILITY COMES A LOT OF NOISE
What is “noise?”
It’s the constant stream of good, bad, and indifferent thoughts and ideas from every stock market talking head and pundit. Combined it becomes an endless supply of noise – like white noise when the cable went out (for those of you in your 20s you might not know what I’m referring to).
Our job is to filter out that noise. We’re here to take the worry out of investing. Whether markets are making new highs, crashing back down, or resembling a roller coaster ride of ups and downs like we’ve seen over the last month plus, the key is to focus on your personal financial goals. Don’t let the noise derail you; don’t let the noise derail your personal financial goals. The noise doesn’t know you and it doesn’t know your financial situation, either.
HOW WE HANDLE MARKET VOLATILITY?
It’s a simple answer fortunately. We stay invested; we don’t get out one day and get back in the next. And we have a good reason why, too. We know we can’t predict if the DOW will be down 875 points over two days only to bounce back 650 points the next day (this happened the last three trading days). If we stay invested every day, we’ll get the good with the bad, and over the long-run, owning stocks give us more good than bad. But if we try to pick when to be in the market or out of it, we can see how extremely hard it is to actually outperform being invested every day.
Take a look at this attachment or what is pasted below courtesy of IFA.com. 20 years of S&P 500 returns were analyzed, and the findings were: missing just a handful of days of returns drastically impacted returns. We’re just not going to consistently guess right and avoid the losing days, but if we try, we subject ourselves to missing the good days, too. And even just missing the 5 best days OUT OF OVER 5,000 days took the return from 9.22% down to 7%.
The moral of the story is: stay invested every single day and grab the market’s return, over time it’s a good return and it will build wealth for your retirement portfolio. But when you play the market timing game, the odds aren’t in your favor that you’ll consistently guess right, and when it comes to your retirement you don’t want it to be a guessing game.
WHEN ADVISORS AREN'T REALLY ADVISORS
So it's like those in the transaction based advisory world (banks, insurance companies, brokerage companies, independent firms like Edward Jones) essentially are saying we call our salespersons advisors, but, by definition, they're not actually advisors & they don't give advice, so they don't need to follow this annoying fiduciary rule thing...oh, and if you have any questions or maybe you're a bit confused by this, just ask your advisor!
Great article from Michael Kitces...
Product distribution industry beat DoL fiduciary by arguing their brokers aren't actually advisors! https://www.kitces.com/…/dol-fiduciary-5th-circuit-appeals…/ via @MichaelKitces
DFA'S "CORE" AND "ALL-IN-ONE" FUNDS EXPLAINED
Included are links to two PDFs. 2018 Core Solutions Brochure explains why we use “core” funds in our investment portfolios. One key component is how they are designed to reduce turnover (turnover is buying and selling stocks within the fund) and transaction costs. Reducing those ultimately lowers mutual fund costs, and those savings are passed on to you the investor in the form of a low expense ratio.
The expense ratio is the price you pay to be in the fund. A fund with an expense ratio of .31% means you pay $3.10 for every $1,000 you have invested in the fund, and you pay this on a yearly basis, too. The expense ratio is rolled into the price of the fund, you do not see it come out of your account like you do our management fee.
Depending on your investment portfolio selection, those funds are titled US Core Equity 1, US Core Equity 2, US Vector Equity, International Core Equity 1, International Vector Equity, and Emerging Markets Core Equity. I encourage you to read page 2 – there I highlighted some text explaining why we use them and how they are designed.
2018 Global Allocation Funds Brochure is for those of you with All-In-One funds in your investment account. These funds go by the names DFA Global Equity, DFA Global Allocation 60 / 40, and DFA Global Allocation 25 / 75. Pages 2 & 3 dive into how these funds are constructed and how they are managed behind the scenes.
MORE THOUGHTS ON VOLATILITY
I came across the below graphic in an article I was reading; unfortunately, I sent a screenshot to myself, but I can’t recall the article or else I’d send that along, too. We can see the types of drops the Dow Jones Industrial Average has seen over a century plus time frame. I underlined ‘has’ because it’s important to remember what has happened is no indicator of what will happen – future outcomes will be the same, better, or worse. But the bigger point is it’s not uncommon to see large drops. Yes, the moves are frightening and the same wild swings to the upside don’t elicit the same reaction, but in reality, these moves are common and are short-lived. Even the 20% or more drop is short-lived when they occur over a lifetime of investing and growing your wealth…and if we have heavy exposure to stocks then we must understand we’re investing for the long-term anyhow and we can’t let short-term movements derail our long-term focus.
