Stay Diversified My Friends

Bonds and Gold have held off the red ink thus far in diversified portfolios.

An equal mix of stocks (S&P 500), bonds (20 yr T-Bond), Cash and Gold has produced a positive return through today of +4.3%. The full tally.

Stocks  - 5.5%
Bonds  + 8%
Cash    +0%
Gold   +15%

What You Should Know About a Bear Market, by Paul Merriman

Paul Merriman is a fellow advisor and this is a very relevant topic in today's market. ~Barry

Editor’s note: Paul Merriman originally published this column in early August, 2015 Then last week, Aug.24-28, stocks had their worst showing in four years. The Dow Jones Industrial Average closed Friday in correction territory, generally defined as a 10% drop from its most recent high. On Monday, August 24th, the Dow Jones Industrial Average quickly fell more than 900 points, topping the 530-point drop on Friday.

The carnage in the Nasdaq Composite has been far worse, with the index plunging more than 8% in early trade. With that in mind, here are his thoughts on what readers need to know about bear markets.

The last several years have been quite kind to equity investors, probably lulling too many of them into a false sense of security. But a bear market is almost certainly on its way. I can't tell you when it will show up. I can't tell you how severe it will be. I can't tell you how long it will last.

But I am pretty sure that the bear will pay us a visit sometime in the next year or two. I'm also quite sure that investors who are familiar with bears (bear markets, that is) will fare better than those who aren't.

So here, in no particular order, are 22 things I think every investor should know about bear markets.

1. What is a bear market? The term is sometimes thrown around loosely. But there's a real definition that's generally agreed on: A bear market is a downturn of 20% or more, lasting at least 60 days, in any broad equity index such as the Dow Jones Industrial Average, the S&P 500, or the Nasdaq. (Figures cited in this column apply to the S&P 500.)

2. If the 20%-plus downturn lasts less than two months, it's considered a correction instead of a bear market. (This doesn't mean it hurts less, but the pain starts easing up sooner.)

3. A bear market is triggered when investors lose faith in the market as a whole — decreasing the demand for stocks. This tends to happen when the economy enters a recession, unemployment is high and inflation is rising.

4. Bear markets are normal, but not predominant. Over the past 200 years, the stock market has risen more than it has declined. The bear accounts for only a minority of the history of the market — but that minority is pretty unpleasant.

5. Like earthquakes, bear markets are hard to predict, but especially hazardous to those who fail to prepare. Since 1929, the U.S. stock market has experienced 25 bear markets, an average of one every 3.4 years.

6. Statistically, we are overdue. The most recent bear market ended in March 2009 — more than six years ago.

7. Also like earthquakes, bear markets don't last forever. Those 25 bear markets lasted, on average, for 10 months.

8. Also like earthquakes, bear markets can be relatively mild or quite harsh. The average bear-market loss was 35%. The smallest loss was 21% in 1949; the worst was a drop of 62% from November 1931 to June 1932.

9. Many of today's investors have lived through two fairly nasty bears: a decline of 58% from 2000 to 2002 and a 57% plunge from 2007 to 2009.

10. Bear markets spook investors who aren't prepared for them. Millions of investors are still nervously on the sidelines following the market rout of 2008. By remaining in cash, they have missed out on a strong, sustained recovery

11. The history of the markets isn't entirely bad. The 25 bull markets since 1929 have lasted an average of 31 months — three times as long as the average bear market. Also encouraging: The average of these bull markets sent stocks up 107%.

12. Like bear markets, bull markets come in all sizes. The smallest bull-market gain was 21%; the largest was (hang onto your hat) 582%, from 1987 to 2000. That prolonged bull market started right after a sudden correction (widely regarded at the time as a crash) in which the market lost 22% in just one day.

13. The bear's bite isn't quite as bad as these numbers make it seem. For technical reasons, the returns cited here were computed without taking reinvested dividends into account. That means the losses were actually slightly less, and the gains slightly more, than the numbers would indicate.

14. Just as a bear market can scare off investors, a prolonged bull market can lead investors to think that market risk is nothing but an outmoded concept. Early in 2000, after nearly 13 years of a bull, millions of investors were stunned when a serious downturn began in the spring.

15. Bear markets don't last forever. I'm not saying it couldn't happen, but it hasn't happened yet. Perhaps the main reason is that broad market indexes are made up of so many stocks.

16. I know of one guaranteed way to absolutely protect yourself from a bear market: Don't ever invest in equities. However, this guaranteed protection has a high cost: You'll never obtain the gains from bull markets.

17. A better way to protect your assets is to diversify among many equity asset classes. This worked very well from 2000 to 2002: while the S&P 500 dropped more than 50%, my recommended equity portfolio fell only about 14%.

18. A third (and very effective) way to protect your portfolio from a bear market: Add bond funds. Over the past 45 years, the worst calendar-year performance for a combination of 40% diversified equities and 60% bonds was a loss of 14.9%, in the devastating year of 2008.

19. Better than either 17 or 18: Do them both.

20. Young people should welcome the bear. This sounds counterintuitive, I know. But young investors are blessed with lots of time. They need the long-term growth that results from buying stocks when they are less expensive so they can (eventually) sell them when they're worth much more. A bear market makes stocks (temporarily) less expensive; this is when young investors should be buying all they can.

21. New retirees, on the other hand, should be particularly wary of the bear. If you retire just before the start of a bear market, the decline will rob you not only of a big chunk of your life savings after you have lost much of your ability to replace them. It may also rob you of the confidence to remain invested in equities, which retirees need to stay ahead of inflation.

22. Bull markets and bear markets look pretty dramatic when you see them in a graph. This article, though it's a couple of years old, contains a chart that does a wonderful job of showing what I mean.
The point of all this information isn't to depress you, but to warn you. After a long bull run, it's easy to get complacent. Don't do it.
My advice is simple: Keep your expectations in check, be patient, and take the long view.

Stocks Roughed up in 3rd Quarter; Bonds Offset Losses

Wall Street produced some tricks, in that the 3^rd quarterly period (July-September) ended lower for stock prices and most lower-quality bonds, with greatly increased volatility in prices. Starting in late August, stock prices fell sharply, and were down over 10% from their summer peaks at one point. In fact, there was just a short two-week span after Independence Day that served as the calm before the storm. The popular, broad-based stock indices – the Dow and S&P 500, fell over 7% for the three months (details below).

With a backdrop of that, it was difficult to make money as stock prices were hammered 7% to 9% on the popular averages*. There was just a two week stretch of time after Independence Day to feel good about the state of affairs, and then the wheels started to wiggle off the wagon. Through the trough or low in stock prices near the end of September, the Dow Industrials and S&P 500 indexes had fallen 10% each during the quarter.

With the threat of interest rates bring raised last month by the Federal Reserve, bonds first fell, then had a good jump up in price for the three months. Gold ended down 4% for the quarter, but did offset the panicky risks intra-period; i.e. August’s super volatile month for stock prices – where stocks fell 9%, saw gold rally 4%. Our goal here is to provide some gains without big drawdowns in bad markets in stocks. Gold has proven to provide a cushion to falling stock prices dating back to 1973.

For our managed accounts, we made some sales of equities in August at higher prices, which were prudent given the poor technical health of the stock market leading up to the late August free-fall and ensuing volatility. Those monies were used for short term bonds and mutual funds and ETFs, as we like to capture these monthly dividends paid on the exchange-traded funds we own between investment. 
We just recently – this month – have started to nibble on our favorite ETF’s as they have proven technically they can be “trusted” and the market averages have recovered a good deal of the lost ground. To that end, we favor utilities and the consumer staples sectors.

Economic-wise, the U.S. economy is faring pretty well vs. the rest of the developed world. Both inflation and jobs are in favorable territory; just 5.1% of our workforce is unemployed and the inflation rate is near 0% the past 12 months. But to be a skeptic also, if conditions can’t really improve much from here, can stocks, bonds and corporate profits move higher still?

Thanks for reading.
~Barry

Barry L. Unterbrink
Chartered Retirement Planning Counselor
(954) 719-1151
Fort Lauderdale, Florida  
* 3Q-2015; S&P 500 down 6.9%, Dow Jones Industrials -7.5%

Gold and Bonds Assist a Diversified Portfolio

                                                                                         1 Sept 2015
Dear friends and clients:

September is not starting out very well for the stock market, with prices today down about 3% for stocks, while Gold and Bonds up about 1/3 of one percent.

For the month of August, a diversified portfolio (25% each) of stocks (S&P 500), bonds (20 yr. Treasury), and Gold and Cash (money market) resulted in a loss of about 1%. Stocks fell 6%, the bonds and cash were essentially break-even, while Gold rose 3.7%.

More importantly, maximum drawdown of the portfolio (the lowest return during the month on a daily close), was just -2.6% on the diversified portfolio, vs. -11.2% for the stocks. That's important and represents the volatility of an all-stock portfolio in a falling market for stocks.

Stay diversified my friends!

Barry Unterbrink, C.R.P.C.
www.stetsonwealthmanagement.com

Stocks Fall Again, Reach 10% Loss in August

Stock prices felt the pain of more sellers today, as equity prices fell around 4%.

Many stock were halted for trading only a few minutes after they opened at 9:30 a.m.  then after they did open later in the morning prices zoomed upward with the demand, creating some wide price swings.

For instance,  Facebook shares traded at 72 early on and closed at 82.  Apple was traded at 92 just after 9:30, and ended the session at 103. Verizon at was on sale at 38, to close at 44.  These are big,  institutionally traded, household name companies, and a lot of investors are upset  that they did not have a chance to buy or sell at these prices. Welcome to the imperfect world of Wall Street.
I came across an interesting statistic on markets from a year ago blog. In the past 10 years, there is a one in 20 chance that stock prices will fall 5% in any given month. If they do, the average decline to the bottom of that cycle is a 12% loss. Stocks have fallen 10% so far in August as measured by the S&P 500 index. So on an average historical basis, the selling might be over. That's just the average (mean) of the fall, however. This 6 year bull market in stock prices we knew would end sometime. We were perhaps surprised that it would take only a week or so to play out (hopefully).

In the six trading days ended today, bonds and gold did help immensely in mitigating stock price declines - the box score: stocks -9%, bonds +2% and Gold +3.4%. Funny but you only hear the doom and gloom on the news reports on stocks (including CNBC, and the talking heads who want to instill fear into the masses).

There's a lot to contemplate the rest of this weekend beyond concerning interest rates, the economic outlook for the third quarter: wait - I'll think of other worried tomorrow. 

Stay tuned, stay calm and don't let fear and greed drive your investment actions.

~Barry Unterbrink

Gold, Bonds Helping Balance the Scales, Protect Assets

                                                                                                                             20-August-15

Gold and Bonds are protecting diversified portfolios that include stocks

Since the market's top in Mid-May near Dow 18,300 - Gold and Long Term Bonds (UST) have offset each other: Gold down 6%, Bonds +6%. However, the tide has turned greatly thus far in August, as Gold has gained about $60 an ounce, or 5%, Silver, up 5%, and Bonds +2%.
Thru mid-day, stocks are lower by about 3% this month. Can this rally in the precious metals continue? Stay tuned for more thoughts on that.

Gold, Bonds Holding Up Portfolios in August

With stocks down about 1% this month (thru Tuesday), bonds and Gold are providing a nice offset, rising 1.7% and 1.3% respectively.

Could this latest equity price swoon be the end of the current rally? Time will tell. I can only preach the value of diversification for all but the most risk-averse investors at this time.

~Barry Unterbrink, C.R.P.C.

First 200 Days of 2015 Mediocre

A diversified portfolio using stocks (S&P 500), bonds, 20 year Treasury, Cash (money market), and Gold bullion has returned -1% thru July 17th.

The stock portion was ahead 4.3%, bonds -3.2%, cash even, and Gold lost 5%. 

The above equal mix of investment is diversified and has historically returned a positive 6-1/2% on average over 25 years, with small risk to principal (drawdown) of -2% to -6 over the five negative years (2008 was down 6%).

Interest Rate Rise Hurts Bonds Bad in 2Q

The U.S. stock market ended the second quarter in a standstill from March 31st. After a decent April and May, as the popular broad market averages gained about 2-3 percent, most of those gains were given back in June. True, the stock market as hovering near all-time highs, a static condition for four months now. That’s old news now. We’re all salivating on what’s in store next. Will fear or greed control our investing decisions going forward?

If you divide the stock market into the 9 sectors that S&P publishes, the health of the market is soon diagnosed as not so chipper. Interest sensitive areas such as Utilities, Industrials, and Real Estate, are all well below their recent peaks in prices in late 2014 and late February 2015. Two stand outs we've owned for months now: HealthCare and Consumer Discretionary stocks/ETFs.

The focus in the media is always on stocks, and the casual follower of the markets may be hearing only the headline news. The BIG story of the second quarter was the rise in interest rates, and the toll taken in the bond markets. The confluence of events the past 6 months or so has led to much higher interest rates on longer term debt, which affects shorter term debt. The ending of the Fed’s quantitative easing, or QE, a stronger U.S. Dollar, and then the rise in long-term interest rates.  Why is this important to stock market investors? Higher borrowing costs equate to lower profits. The super low rates have supported profits the past years, and now the rum is being watered down in the punch bowl. Can the end of the stock market party be too far off? Of course, this is just one catalyst that might support a bear market or top in stock prices. But one worth considering as our markets and lives depend in a large part, of being able to borrow short or long term money to accomplish our financial goals.
To wit: in the April-June period, the 10 year Treasury Bond lost 3%, the 20 year T-Bond lost 8%, and the 30 year T-Bond lost 11% ! If a 20 year Treasury Bond loses 8%, and the interest it pays is 2.7%, then 3 years of interest was lost in the last three months owning this bond. Not a good outcome. The bond price/yield teeter-totter has reversed its course; the weight of the higher rates is causing prices to fall. There will come a tipping point in which bond investors will give up all hope and frantically sell their bonds and bond mutual funds. Perhaps that will mark a temporary bottom and an opportunity to buy. If stocks are not behaving well, they will sell stocks, and that doesn't leave many places to hide. The price drop in the U.S. Treasury bonds was quite dramatic, rippling through the many fixed income areas.

Earning an above inflation rate rate on your savings and investments may be a difficult task the rest of 2015 and beyond, unless  you're nimble and can look outside the "box".

There is a touch of good news for savers here: fixed rates on CD's and annuities are rising. The July rates across my desk are more enticing for those who wish to beat the bond markets ups and down, and have stability of principal. Ask me about how that may work to your advantage. Stay tuned.

Retirement Accounts; the Cold Hard Math on your Savings

                                                                                                                            
* American's have an estimated $24 Trillion in retirement assets.
* The entire gross national US debt is just $18 Trillion, making the retirement market 33% larger.
* There are more than 600,000 people with $1 million in an I.R.A. account; 630,000 from the Government Accounting Office Data from 2011, so there are no doubt many more now.
* More than 300 folks have $25 million or more in their IRA's. Since contributions to IRA's are capped at rather low amounts, the majority of this money was no doubt rollovers from company-retirement plans.
* Defined Contribution Plans, sponsored by employers, total $6.6 Trillion, about a trillion dollars less than I.R.A. account values.

So. Although this is very interesting factoids about I.R.A.'s and retirement plans, what's the take-a-way on this after about 30 years these accounts have been offered and funded.

My first thoughts are that the U.S. government knows all the details about your retirement accounts. You report much of it on your tax forms each year; deposits, withdrawals, year end balances. Next, specific rules are in the law that you must follow along the way to retirement and well into retirement perhaps years from now. They are not easy to follow.

For example: take your retirement money too early – a penalty is due. Put in too much money above their limits – a penalty applies. Take out too little money starting retirement (generally after age 70-1/2), penalty applies. I can see the rationale on this from the Governments view: they gave you the tax break on the money on the way in; so they want their tax when you retire. It was not counted as salary as earned, but now it’s treated as salary when you take distributions.

Some troubles to be aware of: Retiring Early – due to a great pension plan at work, or you were fortunate in your other ‘non-retirement’ assets. You cannot access your IRA money at 56 or 57 without a penalty, 10% normally. 59-1/2 is the rule. It’s your money, and you owe a penalty after having retired? I know folks in this quandary.

Taxes: Oh, yes, the sticky wicket of taxes owed when you pull out your retirement money. That $300,000 in those IRA’s and 401-k’s is now $225,000 net to you after the 25% taxes owed. It’s taxed as a salary would be on your tax return; that’s called ordinary income. The rates range from 10% to 39.6% for 2014. It's a progressive tax; the higher earners pay a larger percentage. The lower capital gains tax rates (if you owned stocks or mutual funds and sold them) are not available to you. Sorry.

The other argument bandied about by the financial media is: you will be in a lower tax bracket when you retire – not always the case: it will depend on a lot of factors outside of this discussion. Plus, the Government is constantly monkeying with the rates anyway, and will find a way to get their ‘pound of flesh’ from you, be it through retirement withdrawals, Social Security taxation, or other nefarious schemes. It can be done, but you have to tax plan diligenltly throughout the year.

The Seed and the Harvest

A workshop I attended last year placed this all in perspective with a presentation on retiring tax free with unlimited amounts of funding for this particular investment. Quite unique if you fit the profile. Anyway, let’s assume you are a farmer plowing a field in the summer, laying down your seeds for the season’s planting, hoping for a bountiful harvest this fall. Your IRA account is being taxed as the ‘harvest. You pay tax on the seed (your contributions), plus the crops growth (your investment growth + dividends paid on your seeds). And, unlike a business, you can’t deduct your expenses for the upkeep on your farming operation (i.e. commissions, fund expenses, management fees, investment losses).  A ROTH IRA is an excellent choice for the younger crowd who can save after tax funds over many years and be assured of no taxation down the road. No deduction on the contributions, no tax when withdrawn. That’s paying on the seed, not the harvest.

Recommendations:

I recommend to own both types of accounts; IRA’s and qualified plans like 401k and 403b, etc., and to have outside money in taxable accounts that you can access prior to retirement age. Each will have different objectives to some degree, with the end goal of being tax efficient when you need to spend the money. If you need help figuring this out, call upon me for a meeting, and maybe you can avoid or mitigate the tax man’s involuntary tithe that’s coming down the road upon retirement.  

Barry L. Unterbrink
Chartered Retirement Planning Counselor (954) 719-1151
Fort Lauderdale, Florida