Johns Island Financial Advisor Archives

Average Annual Return

October 31, 2017 by Justin M. Follmer, MBA, CFP®, AIF®

“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.” —David Booth

The US stock market has delivered an average annual return of around 10% since 1926.¹ But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average annual return of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years. In most years the index’s return was outside of the range, often above or below by a wide margin, with no obvious pattern. For investors, this data highlights the importance of looking beyond average annual returns and being aware of the range of potential outcomes.

TUNING IN TO DIFFERENT FREQUENCIES

Despite the year-to-year uncertainty, investors can potentially increase their chances of having a positive average annual return outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market. The data shows that, while positive performance is never assured, investors’ odds improve over longer time horizons.

Conclusion

While some investors might find it easy to stay the course in years with above average annual returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, having an understanding of how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. In addition, we believe that a Johns Island Financial Advisor can play a critical role in helping investors sort through these and other issues as well as keeping them focused on their long‑term goals. We’d love to get to know you; give us a call to see how we can become your trusted financial partner.

^1. As measured by the S&P 500 Index from 1926–2016.

^2. In US dollars. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns and average annual return do not reflect the cost associated with an actual investment.

^3. From January 1926–December 2016 there are 913 overlapping 15-year periods, 973 overlapping 10-year periods, 1,033 overlapping 5-year periods, and 1,081 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. In US dollars. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not an indication of future results.

^4. Source: Dimensional Fund Advisors with edits by Coastal Wealth Advisors, LLC

2016: A Year in Review

January 18, 2017 by Justin M. Follmer, MBA, CFP®, AIF®

Every year brings its share of surprises. But how many of us could have imagined that 2016 would see the Chicago Cubs win the World Series, Bob Dylan receive the Nobel Prize in Literature, Donald Trump elected president, and the Dow Jones Industrial Average close out the year a whisker away from 20,000?

The answer is very few—a lesson that investors would be wise to remember.

At year-end 2015, financial optimists seemed in short supply. Not one of the nine investment strategists participating in the January 2016 Barron’s Roundtable expected an above-average year for stocks. Six expected US market returns to be flat or negative, while the remaining three predicted returns in single digits at best. Prospects for global markets appeared no better, according to this group, and two panelists were sufficiently gloomy to recommend shorting exchange-traded emerging markets index funds.¹

Results in early January 2016 appeared to confirm the pessimists’ viewpoint as markets fell sharply around the world; the S&P 500 Index fell 8% over the first 10 trading sessions alone. The 8.25% loss for the Dow Jones Industrial Average over this period was the biggest such drop throughout the 120-year history of that index.² For fans of the so-called January Indicator, the outlook was grim.

Then things seemingly got worse.

Oil prices fell sharply. Worries about an economic debacle in China re-entered the news cycle. Stock markets in France, Japan, and the UK registered losses of more than 20% from their previous peaks, one customary measure of a bear market.³ Plunging share prices for leading banks had many observers worried that another financial crisis was brewing. As US stock prices fell for a fifth consecutive day on February 11, shares of the five largest US banks slumped nearly 5%, down 23% for 2016.

The Wall Street Journal reported the following day that “bank stocks led an intensifying rout in financial markets.”⁴ A USA Today journalist observed that “The persistent pounding global stock markets are taking seems to be taking on a more sinister tone and more dangerous phase, with emotions and fear taking on a bigger role in the rout, investors questioning the ability of the world’s central bankers to calm the market’s frayed nerves, and a volatile environment in which selling begets more selling.”⁵

February 11 marked the low for the year for the US stock market. While prices eventually recovered, as late as June 28 the S&P 500 was still showing a loss for the year. Meanwhile, a number of well-regarded professional investors argued that the next downturn was fast approaching. One prominent activist in May predicted a “day of reckoning” for the US stock market, while another reportedly urged his fellow hedge fund managers at a conference to “get out of the stock market.” A third disclosed in August a doubling of his bearish bet on the S&P 500.⁶

Throughout the year, some observers fretted over the pace of the economic recovery. The New York Times reported in July that “Weighed down by anemic business spending, overstocked factories and warehouses, and a surprisingly weak housing sector, the American economy barely improved this spring after its usual winter doldrums.”⁷

Despite all of this noise, the S&P 500 returned 11.9% for the year and international stocks⁸ returned 4.4% for US dollar investors (6.9% in local currency⁹), helping to illustrate just how difficult it is to outguess market prices. Once again, a simple strategy of embracing sensible asset allocation and broad diversification was likely less frustrating than fretting over portfolio changes in response to news events.

We believe it’s as important today as it was 10 years ago to base your portfolio allocation structure on two broad concepts: 1st, your risk tolerance, and 2nd, what financial goals your portfolio will be used for. We help our clients develop their financial goals and then build and monitor a portfolio that marries these goals with their appetite for risk. And we’d love to help you too. Get in touch today.

^1. Lauren Rublin, “Peering into the Future,” Barron’s, January, 25, 2016.
^2. www.djaverages.com, accessed January 6, 2017.
^3. Michael Mackenzie, Robin Wigglesworth, and Leo Lewis, “Stock Exchanges across the World Plunge into Bear Market Territory,” Financial Times, January 21, 2016.
^4. Tommy Stubbington and Margot Patrick, “Banks Drop as Global Rout Deepens,” Wall Street Journal, February 12, 2016.
^5. Adam Shell, “Market Tumult Charts New Waters,” USA Today, February 12, 2016.
^6. Dan McCrum and Nicole Bullock, “Growling Bears Provide Soundtrack for Investors,” Financial Times, May 21, 2016.
^7. Nelson D. Schwartz, “US Economy Stays Stuck in Low Gear,” New York Times, July 29, 2016.
^8. Source: MSCI. International stocks represented by the MSCI All Country World ex US IMI (net div.).
^9. Local currency return calculation represents the price appreciation or depreciation of index constituents and does not account for the performance of currencies relative to a base currency such as the US Dollar. Local currency return is theoretical and cannot be replicated in the real world.
^10. Article written by Weston Wellington with edits by Coastal Wealth Advisors, LLC.

Presidential Elections and the Stock Market

October 24, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Next month, we head to the polls to elect the next president of the United States. Unless you don’t watch the news or spend time on social media, you know how heated this presidential election cycle has become. While the outcome is unknown, one thing is for certain: there will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market, and thus your investment and retirement portfolio. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.

SHORT-TERM TRADING AND PRESIDENTIAL ELECTIONS RESULTS

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of presidential elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after any presidential elections.

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which presidential elections were held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the presidential elections.

Exhibit 1: Presidential Elections and S&P 500 Returns, Histogram of Monthly Returns, January 1926 — June 2016

LONG-TERM INVESTING: BULLS & BEARS ≠ DONKEYS & ELEPHANTS

Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Exhibit 2: Growth of a Dollar Invested in the S&P 500, January 1926–June 2016

Past performance is not a guarantee of future results. Presidential Elections. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.

CONCLUSION

Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

We perform a wide range of services for our clients outside of building, managing, monitoring, and rebalancing investment portfolios. One of the most important of these services, in our opinion, is the conversation we have surrounding behavioral finance, risk tolerance, and their impact on emotional decision making. As you can see by this post, we always turn to “the data” to help guide our advice. If you’re working with a financial advisor today who has positioned your portfolio to try to outguess the presidential elections, give us a call. We’re confident that our approach makes for a more positive investment experience.

1. Content written by Dimensional Fund Advisors, LP with edits by Coastal Wealth Advisors, LLC.

Should Recent Events Change your Investment Strategy?

August 31, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Should recent events change your investment strategy? Should anticipated future events change your investment strategy? When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors stay disciplined during purported “crises.”

At the end of June this year, UK citizens voted in a referendum for the nation to withdraw from the European Union. The result, which defied the expectations of many, led to market volatility as participants weighed possible consequences.

Journalists responded by using the results to craft dramatic headlines and stories. The Washington Post said the vote had “escalated the risk of global recession, plunged financial markets into free fall, and tested the strength of safeguards since the last downturn seven years ago.”²

The Financial Times said “Brexit” had the makings of a global crisis. “[This] represents a wider threat to the global economy and the broader international political system,” the paper said. “The consequences will be felt across the world.”³

It is true there have been political repercussions from the Brexit vote. Theresa May replaced David Cameron as Britain’s prime minister and overhauled the cabinet. There are debates in Europe about how the withdrawal will be managed and the possible consequences for other EU members.

But within a few weeks of the UK vote, Britain’s top share index, the FTSE 100, hit 11-month highs. By mid-July, the US S&P 500 and Dow Jones Industrial Average had risen to record highs. Shares in Europe and Asia also strengthened after dipping initially following the vote.

Yes, the Brexit vote did lead to initial volatility in markets, but this has not been exceptional or out of the ordinary. One widely viewed barometer is the Chicago Board Options Exchange Volatility Index (VIX). Using S&P 500 stock index options, this index measures market expectations of near-term volatility.

You can see by the chart above that while there was a slight rise in volatility around the Brexit result, it was insignificant relative to other major events of recent years, including the collapse of Lehman Brothers, the eurozone crisis of 2011, and the severe volatility in the Chinese domestic equity market in 2015.

None of this is intended to downplay the political and economic difficulties of Britain leaving the European Union, but it does illustrate the dangers of trying to second-guess markets and base an investment strategy on speculation.

Now the focus of speculation has turned to how markets might respond to the US presidential election. CNBC recently reported that surveys from Wall Street investment firms showed “growing concern” over how the race might play out.⁴

Given the examples above, would you be willing to make investment decisions based on this sort of speculation, particularly when it comes from the same people who pronounced on Brexit? And remember, not only must you correctly forecast the outcome of the vote, you have to correctly guess how the market will react.

Should recent events change your investment strategy? We don’t believe so. Should anticipated future events change your investment strategy? In our opinion, your investment strategy should change only when your long-term financial goals change. What we do know is that markets incorporate news instantaneously and that your best protection against volatility is to diversify both across and within asset classes, while remaining focused on your long-term investment goals.

The danger of investing based on recent events is that the situation can change by the time you act. A “crisis” can morph into something far less dramatic, and you end up responding to news that is already in the price.

Journalism is often described as writing history on the run. Don’t get caught investing the same way.

Working with a fiduciary can sometimes shed light in a new way, thereby, providing a perspective you may have been missing. Give us a call today and perhaps we can show you a few things about your current strategy and what changes, if any, could help you build more purpose to your financial goals.

Image Credit: frankieleon

Post authored by Jim Parker, Outside the Flags, with edits by Coastal Wealth Advisors, LLC. Original article here.
“Brexit Raises Risk of Global Recession as Financial Markets Plunge,” Washington Post, June 24, 2016.
“Brexit and the Making of a Global Crisis,” Financial Times, June 25, 2016.
“Investors are Finally Getting Nervous about the Election,” CNBC, July 13, 2016.

Where There’s a Will, There’s a Way

August 3, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

We’ve all heard this phrase: where there’s a will, there’s a way. It’s typically said during difficult moments where success seems almost impossible; almost as if to say my determination will be enough to get through this trouble.

When we die, our troubles disappear for us…but not for those we love. Our loved ones inherit both the good and bad that accumulated during our lives. To make the life of your loved ones less troubling, perhaps you should think of this phrase a bit differently.

Where there’s a WILL, there’s a way.

A WILL is a legal document that transfers what you own to your beneficiaries upon your death. It also names an executor to carry out the terms of your WILL and a guardian for your minor children, if you have any. Your signature and those of witnesses make your WILL authentic. Witnesses don’t have to know what the WILL says, but they must watch you sign it and you must watch them witness it. Hand-written WILL s — called holographs — are legal in about half of the states, but most WILL s are typed and follow a standard format.

According to Legalzoom, it’s estimated that 55% of American adults don’t have a WILL or another estate plan in place. And that percentage is even worse among minorities – 68% for African-Americans and 74% of Hispanic-Americans.⁽¹⁾

Without a WILL, you die intestate. The laws of your state then determine what happens to your estate and your minor children. This process, called administration, is governed by the probate court and is notoriously slow, often expensive, and subject to some surprising state laws. Do you really want a court deciding vital family matters such as how to divide your estate and custody of your children?

So, who needs a WILL?

We believe the short answer is everyone! However, it’s imperative to make a WILL as soon as you have any real assets, or get married, and certainly by the time you have children. Your WILL should contain several key points in order to be valid. The following list are some of the items that your WILL should address:

Your name and address.
A statement that you intend the document to serve as your WILL.
The names of the people and organizations — your beneficiaries — who will share in your estate.
The amounts of your estate to go to each beneficiary (usually in percentages rather than dollar amounts.)
An executor to oversee the disposition of your estate and trustee(s) to manage any trust(s) you may establish.
Alternates to provide both executor responsibilities and trustee(s).
A guardian to take responsibility for your minor children and possibly a trustee to manage the children’s assets in cooperation with the guardian.
Which assets should be used to pay estate taxes, probate fees and final expenses

The answers to these points should give your WILL the necessary resources to address what you wish to happen to your estate. We believe it’s very important to seek the professional skills and guidance of an estate planning attorney who can take your answers and draft a WILL that is completely tailored to you. Estate laws change over time and establishing a relationship with a local estate planning attorney can help you keep your legal documents up to date.

Check out: You don’t know what you don’t know until you know it.

We’re not attorneys, don’t give legal advice, and don’t receive any form of referral fee, but, we help our clients quarterback this discussion with a competent estate planning attorney. In fact, we’re often the first person family members call on to do a lot of the leg work during the time of a loved one’s unfortunate death. When a WILL isn’t present, or doesn’t accurately address your current assets and liabilities, it can create a lot of uncertainty, stress for family members, and costs at a time when they are mourning the loss of you. Get in touch with us today to start the process of gathering the information to create your WILL. Where there’s a WILL, there’s a way; you just need the determination and help to get it done.

^1. http://info.legalzoom.com/statistics-last-wills-testaments-3947.html