Perspective on This Week’s Market Events

It looks like the U.S. stock market will finally get something that happens, on average, about once a year: a 10+% percent drop—the definition of a market correction. Today the S&P 500 stocks are, in aggregate, worth 6.5% less than it was at the beginning of the week, or to put it in perspective, about where the index was in late November. The last correction was had was a whopper—the Great Recession drop that caused U.S. stocks to drop more than 50%–so most people today probably think corrections are catastrophic.  They aren’t.  More typically, they last anywhere from 20 trading days (the 1997 correction, down 10.8%) to 104 days (the 2002-2003 correction, down 14.7%).  Corrections are unnerving, but they’re a healthy part of the economy—for a couple of reasons.

         Reason #1: Because corrections happen so frequently and are so unnerving to the average investor, they “force” the stock market to be [...]

When the Index Beats the Algorithms

Click Here to View as a PDF

You might wonder why there wasn’t more media coverage of one of the most interest bets ever made in the investment world. We’re not talking about betting on a company; this bet was made between Berkshire Hathaway chairman Warren Buffet and a hedge fund called Protégé Partners, on whether a basket of hedge funds managed by algorithms and super investors would beat a simple S&P 500 index fund over a period of 10 years—which happened to include the Great Recession and one of the longest bull markets in history. Each side put about $320,000 in 2007, with the proceeds—including all gains—going to charity.

The final score wasn’t even close. The index fund gained 7.1%, compounded annually. The basket of hedge funds returned a below-average return of 2.2%.

The original intent of the bet was to prove a point: that it is usually impossible to outthink [...]

2017 Year-End Investment Market Report

Click Here to View as a PDF

The bull market continued for another year, causing market indices to soar to new heights over and over again and—ominously—also pushing valuations further beyond the long-term averages.

A breakdown shows that just about everything gained in 2017. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 6.39% for the 4th quarter, finishing the year up 20.99%. The comparable Russell 3000 index was up 21.13% for the year.

Looking at large cap stocks, the Wilshire U.S. Large Cap index gained 6.70% in the fourth quarter, providing a 21.84% return for the year. The Russell 1000 large-cap index finished the year with a similar 21.69% gain, while the widely-quoted S&P 500 index of large company stocks gained 6.12% during the year’s final quarter and overall returned 19.42% gains in calendar 2017.

Meanwhile, the Russell Midcap Index finished the 2017 calendar year up 18.52%.

As measured by the [...]

“Bearing” in Mind

Click here to read as a PDF

One of the oddities of a significant bull market—and this one we’re in today qualifies, as the second-longest in modern American history—is that they tend to go on longer than you might expect from the pure market fundamentals. The last leg of a bull market tends to be driven by psychology; people have recently experienced an up market, and so they tend to expect more of the same. They buy at prices they would never consider buying at when the markets have experienced a downturn, driving prices ever higher without regard to the price. As a result, the long tail of the bull market will also see some of the greatest, fastest increases.

Fig 1.0

Whenever stocks become more expensive than their long-term averages, we enter a time of when a market downturn should not be a surprise. Today, as you can see from the [...]

Thinking it Through – Residential Real Estate as an Investment

Click here to view as a PDF

There are three basic investments that investors can generally make.

The first — which I prefer because of the return on investment and the lack of time it takes for the investor with a good professional money manager — is a well-diversified stock portfolio.

The second most common investment is bonds, which are considered very safe. Unfortunately, too many people don’t understand the inverse correlation of interest rates to bond prices, and the effect they can have on investors’ principal if they invest at the wrong time.

Last is real estate. Real estate can be invested through a broker and what is known as a real estate investment trust, which I have discussed before. Today I’m talking about investors actually buying rental properties as an investment.

Be careful of those who hype the benefits of real estate investing and tell you about all the money they made. [...]

Why Rebalance?

Click to view as a PDF

You probably know that your investment portfolio is being rebalanced on a regular basis, but you might not know why. Is it for higher returns? For maintaining the agreed-upon balance of investments that is in your risk tolerance comfort zone? Does rebalancing help manage portfolio risk?

The answer to the above is “yes,” “yes,” and “yes,” but with a qualification. Rebalancing an investment portfolio is most importantly a form of discipline, a way to reduce the impact of those dangerous emotions of greed and panic on the investment process.

Rebalancing is necessary because all of the moving parts in your portfolio rise and fall at different times and degrees. During a bull market, stock prices rise faster than bond values, causing them to make up a larger percentage of the portfolio than you signed on for. Similarly, when the bear growls, stocks will fall faster than [...]

What the New Tax Bill Means for You

Click here for a PDF version

The new tax law hasn’t been formally ratified by the U.S. House and Senate, but all indications are that the Tax Cuts and Jobs Act of 2017 will be sent to the President’s desk in the next few days.  As you probably know, the House and Senate versions were somewhat different.  What does the new bill look like?

Despite the promise of tax “reform” or “simplification,” the bill actually adds hundreds of pages to our tax laws.  And the initial idea of reducing the number of tax brackets was apparently tossed aside in the final version; the new bill maintains seven different tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%.  Most people will see their bracket go down by one to four percentage points, with the higher reductions going to people with higher income.  And the tax brackets, going forward, will be indexed [...]

Tax Reform: Reconciling the Differences between the House and Senate Versions

The U.S. House of Representatives passed its proposed tax “reform” bill last month, and now the Senate has followed suit.  Interestingly, the two bills are different enough that the two sides are going to have to meet and hammer out a compromise.

Here’s a quick glance at the provisions in the Senate bill and some of the differences.

First, the Congressional Budget Office created a quick report that assesses a variety of income levels, and whether they’ll come out ahead, tax-wise (blue and white cells) or will lose ground financially (pink cells) under the proposed bill.  (See graphic).

Under the Senate bill, there would be seven tax brackets (compared with four in the House version): 10%, 12%, 22%, 24%, 32%, 35% and 38.5%.  The threshold to reach the top rate would be raised from $418,000 (single) or $480,000 (joint) to $500,000/$1 million.

The Senate bill raises the standard deduction to $12,000 for [...]

2017 Third Quarter Report

2017 Third Quarter Report
Click here to view as a PDF

The last few years of a bull market are always a bit of a mystery to professional investors; the market rises faster than it did in the early, cautious years when nobody believed there WAS a bull market, even though there appear to be fewer fundamental or economic reasons for it. The current bull market churns on, even if nobody can explain it, and people who bail out in anticipation of a downturn do so at the risk of missing out on an untold number of months or years of (still somewhat inexplicable) gains.

A breakdown shows that just about everything gained at least modestly in value these last three months. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—rose 4.59% for the most recent quarter, finishing the first three fourths of the year up 13.72%. The comparable [...]

Couples Decision Therapy

Couples Decision Therapy
Click to view as PDF.

There have been studies showing that financial issues are one of the primary reasons why married couples fall apart.  A recent article in Market Watch suggests that the biggest reason for these significant disagreements is a failure to create a unified view of the financial future that both parties have agreed to.  In many cases, one dominant spouse will make decisions on behalf of the couple, which can lead to disagreements (and potential divorce) down the road, as one spouse feels left out of the picture.


How can you come to a basic mutual understanding of your financial priorities?  Even if you already have a financial plan, there may be areas where you disagree with the current one.  Sit down with your spouse and write down the answers to a few basic questions.  How would you like to live when you retire?  What [...]