UPDATE: Domestic Markets Soar as United Kingdom Scraps Taxation

By Staff Reporters

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The Dow surged 825 points, or 2.8%. The Dow has soared more than 1,500 points in the past two days. It is now back above the key 30,000 milestone and is about 18% off its most recent record high, meaning that is no longer in a bear market.

The S&P 500 and Nasdaq gained 3.1% and 3.3%, respectively. But both of those indexes remain in bear territory, at more than 20% off their all-time highs.

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The UK is scrapping its plan to remove the 45% top rate of income tax, calling it a huge distraction from other priorities. The plan, which the government defended just recently, caused a mini-financial meltdown before the Bank of England stepped in with emergency measures.

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UPDATE: Deflation with August Stock Round-Up?

By Staff Reporters

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Inflation is starting to “drop like a rock” rather than a feather, leading to outright deflation in some areas of the economy, Fundstrat’s Tom Lee said in a note. A slowdown in rising inflation would be welcome news to investors given that the stock market has sold off 5% since Fed Chair Jerome Powell’s hawkish speech at Jackson Hole last week. Powell reiterated the Fed’s resolve to tame inflation by being aggressive with interest rate hikes and a reduction to its $9 trillion balance sheet. The market currently expects another outsized 75 basis point rate hike from the Fed at its FOMC meeting in late September. If inflation cools and is less “sticky” than most expect, it could change the Fed’s current interest rate hike trajectory, ultimately leading to a faster pivot towards a pause in rate hikes. That would be a boon for risk assets, which have been stymied in recent months by fast rising interest rates.

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U.S. stocks ended the month with their fourth straight daily decline cementing the weakest August performance in seven years as worries about aggressive interest rate hikes from the Federal Reserve persist. Adding to pressure were declines in the technology sector, and more specifically chip-makers, after soft forecasts from Seagate and HP Inc. The three main indexes suffered their biggest monthly percentage declines in August since 2015. After hitting a four-month high in mid-August, the S&P 500 has stumbled in recent weeks, dropping more than 7% through the close and falling through several closely watched technical support levels.

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UPDATE: The Domestic Stock Markets

By Staff Reporters

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The Dow Jones Industrial Average shed 0.46%, or 142.62 points, to 30,630.17, while the S&P 500 dipped 0.3% to 3,790.38. The NASDAQ Composite inched 0.03% higher to finish at 11,251.19.

During the Dow’s losing streak, the biggest price decliners were the stocks of Goldman (-$18.82), UnitedHealth Group Inc. (-$18.44), Microsoft Corp. (-$16.48) and Salesforce Inc. (-$15.98); those stocks shaved a combined 460 points off the Dow’s price during the streak.

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Financial Monte Carlo Simulation’s FLAW and FIXES

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Physicians Must Understand Deus ex Machina

[By Wayne J. Firebaugh Jr; CPA, CFP®, CMP™]

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wayne-firebaughNamed after Monte Carlo, Monaco, which is famous for its games of chance, MCS is a software technique that randomly changes a variable over numerous iterations in order to simulate an outcome and develop a probability forecast of successfully achieving an outcome.

Endowment Fund Perspective

In private portfolio and fund endowment management, MCS is used to demonstrate the probability of “success” as defined by achieving the endowment’s asset growth and payout goals. In other words, MCS can provide the endowment manager with a comfort level that a given payout policy and asset allocation success will not deplete the real value of the endowment.

Divorce from Judgment

The problem with many quantitative software and other tools is the divorce of judgment from their use. Although useful, both mean variance optimization MVO and MCS have limitations that make it so they should not supplant the physician investor or endowment manager’s experience. MVO generates an efficient frontier by relying upon several inputs: expected return, expected volatility, and correlation coefficients. These variables are commonly input using historical measures as proxies for estimated future performance. This poses a variety of problems.

Problems with MCS 

First, the MVO will generally assume that returns are normally distributed and that this distribution is stationary. As such, asset classes with high historical returns are assumed to have high future returns.

Second, an MVO optimizer is not generally time sensitive. In other words, the optimizer may ignore current environmental conditions that would cause a secular shift in a given asset class returns.

Finally, an MVO optimizer may be subject to selection bias for certain asset classes. For example, private equity firms that fail will no longer report results and will be eliminated from the index used to provide the optimizer’s historical data [1].

Example:

As an example, David Loeper, CEO of Wealthcare Capital Management, made the following observation regarding optimization:

Take a small cap “bet” for our theoretical [endowment] with an S&P 500 investment policy. It is hard to imagine that someone in 1979, looking at a 9% small cap stock return premium and corresponding 14% higher standard deviation for the last twenty years, would forecast the relationship over the next twenty years to shift to small caps under-performing large caps by nearly 2% and their standard deviation being less than 2% higher than the 20-year standard deviation of large caps in 1979 [2].

Table: Compares the returns, standard deviations for large and small cap stocks for the 20-year periods ended in 1979 and 1999.  Twenty Year Risk & Return Small Cap vs. Large Cap (Ibbotson Data).

1979 1999
Risk Return Correlation Risk Return Correlation
Small Cap Stocks 30.8% 17.4% 78.0% 18.1% 16.9% 59.0%
Large Cap Stocks 16.5% 8.1% 13.1% 18.6%

Reproduced from “Asset Allocation Math, Methods and Mistakes.” Wealthcare Capital Management White Paper, David B. Loeper, CIMA, CIMC (June 2, 2001).

More Problems with MCS

David Nawrocki identified a number of problems with typical MCS as being that most optimizers assume “normal distributions and correlation coefficients of zero, neither of which are typical in the world of financial markets.”

Dr. Nawrocki subsequently describes a number of other issues with MCS including nonstationary distributions and nonlinear correlations.

Finally, Dr. Nawrocki quotes Harold Evensky who eloquently notes that “[t]he problem is the confusion of risk with uncertainty.

Risk assumes knowledge of the distribution of future outcomes (i.e., the input to the Monte Carlo simulation).

Uncertainty or ambiguity describes a world (our world) in which the shape and location of the distribution is open to question.

Contrary to academic orthodoxy, the distribution of U.S. stock market returns is far from “normal” [3]. Other critics have noted that many MCS simulators do not run enough iterations to provide a meaningful probability analysis.

Assessment

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Some of these criticisms have been addressed by using MCS simulators with more robust correlation assumptions and with a greater number of iterative trials. In addition, some simulators now combine MVO and MCS to determine probabilities along the efficient frontier.

Conclusion

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References:

1. Clark, S.E. and Yates, T.T., Jr. “How Efficient is your Frontier?” Commonfund Institute White Paper (November 2003).

2. Loeper, D.B., CIMA, CIMC. “Asset Allocation Math, Methods, and Mistakes.” Wealthcare Capital Management White Paper (June 2001).

3. Nawrocki, D., Ph.D. “The Problems with Monte Carlo Simulation.” FPA Journal (November 2001).

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Tax Deductions versus Tax Credits

By Staff Reporters

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What is a tax deduction?

A deduction reduces the amount of income you pay taxes on, which means you could pay less in taxes. You subtract deductions from your income before calculating how much taxes you owe. How much a deduction saves you depends on your income tax bracket.

To calculate how much a deduction could reduce your taxes, you multiply the amount of the deduction by your marginal tax rate. For example, if a deduction is worth $5,000 and you are in the 10% tax bracket (the lowest), the deduction would reduce your taxes by $500.

A deduction’s value to you is tied to your tax rate. So if you’re paying a higher tax rate, you can reap more of a deduction’s benefit. The lower your tax rate, the less benefit a deduction will have for you. Imagine that you take a $5,000 deduction, but you’re in the 35% tax bracket — the second highest. Now you’re saving $1,750 in taxes.

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What is a tax credit?

On the other hand, a credit is a dollar-for-dollar reduction in the amount of tax you owe. For example, if you qualify for a $1,000 tax credit of some kind and owe $5,000 in taxes, that credit will reduce your tax burden to $4,000.

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But – Do Not Claim Too Many Tax Deductions

Deductions are enticing to taxpayers because they can reduce the amount of your income before you calculate the tax you owe, which in turn might significantly lower how much you have to pay in taxes or increase your refund. But that doesn’t mean you should go wild writing things off on your tax returns, as experts say claiming too many deductions is the most common reason people end up getting audited by the IRS.

Don’t try writing off deductions that are no longer accepted by the IRS. The tax code has changed over the years, and there are some things the tax agency no longer recognizes. You should remember that some of the tax write-offs were terminated by the IRS, including deductions on alimony, moving expenses, and any expenses related to investing, hobbies, and tax preparation.

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UPDATE: Domestic Stocks Fall Amid FOMC Comments

By Staff Reporters

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US. stocks faltered and were dragged down by losses in tech, as investors weighed remarks by Federal Reserve [FOMC] Governor Lael Brainard that indicated policymakers were ready to act more aggressively to rein in inflation. Investors also monitored reports indicating the U.S. and European Union are expected to unveil more sanctions against Russia on Wednesday.

The S&P 500 tumbled 1.3%, and the Dow Jones Industrial Average shed 280 points after climbing for two straight trading sessions. The NASDAQ Composite plunged 2.3% to log its biggest drop in three weeks and erase gains from a tech rally that helped the index pop on Monday. Meanwhile, the 10-year U.S. Treasury yield jumped to 2.56%, its highest level since May 2019.

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Brainard, who is awaiting a confirmation vote to serve in the central bank’s number two role, said at a conference on Tuesday that the Fed can raise interest rates more aggressively to dampen the high rate of inflation felt by Americans, also noting that officials will likely start shrinking asset holdings in a about a month (a move that could have the effect of further raising long-term interest rates).

“Currently, inflation is much too high and is subject to upside risks,” Brainard said. “The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”

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UPDATE: First Quarter Stock Index Review & T-Bond Yields

By Staff Reporters

U.S. stocks fell Thursday afternoon to cap a quarter in which Federal Reserve monetary tightening and the Russian invasion of Ukraine have weighed on sentiment and has put the S&P 500 on track for its first quarterly loss in two years.

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How stock indexes performed?

  • The Dow Jones Industrial Average fell 336 points, or 1%, to about 34,893.
  • The S&P 500 was down 38 points, or 0.8%, at 4,564.
  • The NASDAQ Composite shed 107 points, or 0.7%, to trade near 14,335.

BONDS: The yield on the 10-year Treasury fell to 2.331%, while the yield on the 2-year Treasury was at 2.337% at one point in late trading Thursday. After a brief inversion, both yields were basically trading at the 2.34% level in the latest trading.

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HAPPY APRIL 1st 2022

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Top 25 Members of the S&P 500

CIRCA: 1972 – 2020

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Should a diversified investment portfolio produce the same return as US stocks?

 On unrealistic expectations

By Rick Kahler CFP®

I have a complaint. The pot pie at one of my favorite restaurants doesn’t taste like a pot roast. I keep complaining, but nothing changes. I am thinking I may need to find a new restaurant because their cooking skills are just not living up to my expectations.

Or maybe I need to adjust my expectations. How can I expect a pot pie—a savory pastry with a mixture of potatoes, vegetables, and beef chunks—to taste like a beef pot roast? Even though beef is an ingredient in a pot pie, no reasonable diner would expect the two meals to taste the same.

Investing

But, that same reasonable diner might be perfectly comfortable expecting that their diversified investment portfolio should produce the same return as US stocks. This is just as unrealistic as it is to expect pot pie and pot roast to produce the same taste.

A diversified portfolio has a variety of investments in it, just as a pot pie has a variety of ingredients in it. A pot pie provides a complete meal with a nice balance of grain, veggies, and protein with a tasty blend of spices. A pot roast provides just one component of a balanced meal, a heavy dose of protein.

Likewise, a diversified portfolio is a meal in itself. A particular recipe that I like has the equivalent of a flour crust made of high quality bonds, high yield bonds, and Treasury Inflation Protected Securities. Stuffed inside is a delicious blend of real estate investment trusts, international stocks, US stocks, emerging market stocks, commodities, all flavored with managed futures, a long/short fund, and a put/write investment strategy.

The flavor of the diversified portfolio is completely different from an investment of just US stocks. Yet investors regularly try to compare the two.

EXAMPLE:

A few months ago, a reader wanted to know why her small account with a well-known brokerage house was doing three times better than her IRA managed by a fee-only advisor. She was thinking she should put all her IRA money with the brokerage firm.

Following up revealed the ingredients in her IRA: 30% was in a global mix of 1,100 high quality bonds, 300 high yield bonds, and 20 TIPS. The remaining 70% was in a global mix of 12,000 US, international and emerging market companies of all sizes, 300 real estate investment trusts, 21 commodities, a long/short fund with hundreds of positions, and a smattering of other investment strategies.

The small brokerage account had just one ingredient: 31 large US stocks.

Over the previous 15 months, the globally diversified portfolio had returned 9% and the 31 US stocks had returned 21%. Of course, the US stocks in her diversified portfolio had also returned 21%, but just like the chunks of beef in a pot pie, they only made up part of the mix, in this case 17%. So, comparing the diversified pot pie of her IRA return to the single-ingredient pot roast of her brokerage account was not valid.

Over the past nine years nothing has done better among major asset classes than US stocks. Any diversified portfolio will have underperformed them. That phenomenon will inevitably end. The time will come, sooner or later, when US stocks will be one of the worst performers of the decade.

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Assessment

Just as a diversified portfolio will often garner smaller returns when US stocks rise, it will also have substantially higher returns when US stocks crash. At that time, those with diversified portfolios will be thankful that they stayed the course. And millions of other investors will be wishing they had ordered pot pie instead of pot roast.

Conclusion

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A [Physician] Investor’s Worst Enemy?

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Fear of Missing Out

By Lon Jefferies CFP MBA

Lon JefferiesFear of missing out (FOMO) is an increasingly powerful emotion in our daily lives – so much so that FOMO was officially added to the Oxford English Dictionary in 2013.

DEFINITION

Have you ever looked at your Facebook feed and been jealous of someone’s picture from a beautiful viewpoint, or enviable of a friend’s photo of an expensive dinner with a strategically placed bottle of fancy wine in the background?

That is FOMO – the fear that at any given moment someone is doing something more appealing than what we are doing at the time.

Part of Life

A fear of missing out has always been part of life, but it has become more prevalent with the emergence of social media. Personally, I can’t help but check my Twitter feed every hour or so to make sure that I’m not missing out on an article published by one of my favorite financial writers. Yet, social media has increased the power of FOMO more than I realized.

Example

I have absolutely zero interest in horse racing – frankly, I dislike the sport. However, due to all the hype on Facebook and Twitter, I couldn’t help but watch the Belmont Stakes out of fear of missing American Pharaoh become the first Triple Crown winner of my lifetime.

FOMO is frequently a counter-productive emotion, leading to jealousy of others, dissatisfaction with our own lives, and bad decision-making processes. Nowhere is the negative impact of FOMO more apparent than in some individuals’ investment strategy. For years, no one has enjoyed going to the neighborhood BBQ only to have to listen to their next door neighbor brag about how his portfolio has outperformed the S&P 500 index over the last six months. Not only is listening to the boasting annoying, it makes us discontent with the return our own portfolio has achieved and makes us wonder if we should adapt a different strategy (i.e. take more risk right after the market achieved a new all-time high).

Social media has expanded the impact of FOMO on investment strategies. For the last year, the internet has ensured we are aware that large cap indexes like the S&P 500, Dow Jones Industrial Average, and NASDAQ are at all-time highs and achieving appealing returns, and we wonder why our more diversified portfolio isn’t behaving in a similar fashion. It is hard to be content with our diversified strategy when every media outlet is constantly reminding us how we are missing out on the stellar performance that could be obtained if only we had a non-diversified portfolio that invested only in the asset category that is currently in the middle of a hot streak.

When it comes to investing, FOMO is significantly impacted by recency bias. Our fear of missing out becomes more and more intense after the market has just experienced an uptick. If we take a couple of steps back, it is clear why we maintain a diversified portfolio – it provides the most appealing tradeoff between maximizing returns and minimizing risk.

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FOMA
                                

Fear Of Missing Out

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Yet, it is hard to remind ourselves of this when it seems like everyone around us is taking advantage of the latest market trends and we are missing out.

Of course, changing our portfolio to try and take advantage of a run that has already taken place would be foolish, as we would be selling assets with prices that have remained flat and may now be undervalued relative to the market in order to buy assets that have recently experience significant growth and are likely now expensive. These are the type of decisions that FOMO can cause and we would be wise to avoid this type of thinking.

A Re-Do?

We have been in this position before. In the late 1990s, people wanted to abandon their diversified portfolio and put a heavy focus on the technology stocks that were making all their neighbors rich. In the mid 2000s, everyone wanted to borrow as much money as possible and utilize the funds to buy and flip real estate.

In the early 2010s, everyone was wondering if they should sell their stocks before a double-dip recession began and use the resulting funds to buy gold. In each of these scenarios we were hearing individual stories of others who had implemented these strategies and were doing better than we were.

Of course, with the benefit of hindsight, we can see that changing our long-term investment strategy due to a fear of missing out on what was working for others over a short time period would have been a drastic mistake in each of these circumstances. After the market has done well, recency bias and FOMO causes investors to be more afraid of missing a bull market than of suffering large losses.

However, in these times, we need to remember that we chose a diversified investment strategy because it provides us with the highest probability of obtaining our financial goals while exposing us to the least amount of volatility possible.

Assessment

When the media and our acquaintances insist on informing us how we would have been better off placing heavy bets on the asset categories that have recently done well, we would be well served to remember that a diversified portfolio strategy will almost certainly provide us with the best chance to achieve long-term investment success. 

Conclusion

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On The Next Stock Market Correction?

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Remember the Ace Up Your Sleeve!

By Lon Jefferies MBA CFP® CMP®

Lon JeffriesAfter the historic growth the stock market has experienced since early 2009, many physician investors have felt that a healthy pullback may not be a completely negative thing.

After all, we certainly don’t want another bubble, or stock prices that are clearly out of line with the earning potential of the underlying companies.

Unfortunately, market corrections never feel healthy when they occur. Physicians, investors and almost all people get uncomfortable when the market declines, the media fans the flames by giving investors reason after reason to be afraid, and worries that this is the beginning of the next crash begin to develop.

While many investors admit that a 5% pullback is manageably unpleasant, concerns expand when the market decline hits 10% — right when the media can officially throw around the word “correction.”

Of course, we have no idea when the next drop will occur, but why not mentally prepare ourselves by exploring what has traditionally happened to stock prices once that 10% decline is crossed?

The Data

Ben Carlson, an institutional investment portfolio manager, looked at the S&P data going back to 1950, and found that there have been 28 instances when stocks fell by 10% or more. Thus, on average, the market has entered an official correction every 2.25 years. The last market correction occurred in 2011, so another 10% drop at this time would correlate pretty close to the average amount of time between corrections.

Obviously, the market has done pretty well since that last temporary correction in 2011. Clearly, such a drop is quite normal and far from historically concerning.

  • S&P 500 Losses of 10% or More Since 1950
  • Total Occurrences: 28 Times
  • Average Loss: -21.6%
  • Median Loss: -16.5%
  • Average Length: 7.8 Months
  • Greater Than 20% Loss: 9 Times
  • Greater Than 30% Loss: 5 Times

Your Advantage

Are you thinking “I don’t think I can stomach that median loss of 16.5%?” Then it’s time to pull out the ace up your sleeve. Remember that the data above represents the historical performance of the S&P 500 – an index that is composed of 100% stocks. A capable financial planner would ensure you have an asset allocation mix between stocks, bonds, and cash that represents your tolerance for risk.

Consequently, your portfolio likely isn’t 100% stocks. In fact, the appropriate allocation for an average investor approaching or already enjoying retirement might be closer to only 50% stocks. This means that on average, your portfolio should decline only half as much as the S&P 500 during market downturns.

This ace may bring the loss endured by our sample investor with a 50% stock portfolio down to around 8.25% during the median decline. Are you now back in the “manageably unpleasant” range? If so, you likely have an appropriately constructed portfolio. If not, your risk tolerance may need to be reevaluated to ensure you are not exposing your nest egg to a larger loss than you can endure.

Avoid Harmful Reactions to the Market

Although the recent market pullback produces what seems like a foreign feeling, we’ve been here before. The S&P 500 declined in value by 18.64% over a 5 month period in 2011. However, an investor with a 50% stock portfolio likely only saw their account values drop around 9%-10% — still not fun, but manageable.

Assessment

Of course, we don’t know whether the market will continue to bounce back or again drop into official correction territory. If you continue to hear about the broad markets declining, remember that the average historical correction has been far from catastrophic, and that you have the ace of an appropriate asset allocation up your sleeve.

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How Have Bonds Responded to Higher Interest Rates?

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A Survey of Economists

By Lon Jefferies MBA CFP™

Lon JeffriesRecently, I pondered the possibility of interest rates rising and the impact it might have on bonds. The article was motivated by a Wall Street Journal survey of 50 top economists who forecasted the yield on the 10-year Treasury bond to rise to 3.47% by the end of 2014.

As you may know, the investment return of existing bonds tends to move inversely to interest rates. Consequently, there has been significant concern that bond values are due for a considerable drop, and investors have constantly questioned whether they should reduce their exposure to fixed-income investments.

The Forecast Results

So how has the economists’ forecast panned out through January? The 10-year Treasury bond began the year at 3.03%, but ended January at 2.65% — a significant decline.

As a result, bonds have generally increased in value. For instance, the iShares Investment Grade Corporate Bond ETF (LQD) is up 1.88% since the New Year, while the iShares Barclays 7-10 Year Treasury Bond (IEF) is up 3.06%. Even the SPDR Barclays International Treasury Bond ETF (BWX) is up .45% in 2014.

Why?

What has caused this unexpected result?

First, the historical inaccuracy of interest rate forecasts is well documented. A study by the University of North Carolina found economists predict future rates far less accurately than a random coin flip would fare as a predictor. Rising interest rates have been a general expectation since shortly after the market crash of 2008. Remember all the people who refinanced their homes away from an adjustable-rate mortgage to a fixed mortgage from 2010-2011 out of fear of rising rates? That rate hike still hasn’t come.

But, more important than the unpredictable nature of interest rates is the way bond performance has historically been related to the stock market’s performance.

In difficult market environments, the investment returns of stocks and bonds tend to have an inverse relationship. In fact, the S&P 500 (a broad measure of the U.S. stock market) has decreased in value during a calendar year five times since 1990 (1990, 2000, 2001, 2002, 2008). In all five instances, the value of U.S. Government Bonds (as measured by the Barclays Long-Term Government Bond Index) has increased (6.29%, 20.28%, 4.34%, 16.99%, and 22.69%, respectively).

RISK

Performance of Equities

How have risky stocks performed in 2014? The S&P 500 is down -3.46%, the Dow Jones Developed Market ex-U.S. market index (a measure of international stock performance) is down -3.64%, and the iShares MSCI Emerging Markets Index is down -8.63%.

It appears investors have fled stocks in a declining market and sought solace in the fixed income benefit that bonds provide, in-step with historic behavioral norms. Of course, higher demand for bonds means higher values. This last month has been a nice reminder of the stability bonds can add to a portfolio in a time of declining stock prices.

Assessment

While it is reasonable to expect interest rates to rise by some measure over the long-term, it would clearly be a mistake to dramatically shift your asset allocation away from bonds if they were determined to be a part of an investment portfolio that matches your risk tolerance.

January 2014 illustrated that bonds tend to increase in value and add benefit to a portfolio during market pullbacks, regardless of what interest rates are doing. In fact, bonds’ historical inverse relationship with stocks may be a larger determinate of performance than interest rate expectations.

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Conclusion

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Is a Stock Market Correction Imminent?

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Destined for a significant pullback; or not!

By Lon Jefferies MBA CFP® http://www.NewWorthAdvice.com

Lon JefferiesThe market has allowed itself a well-deserved “cool down” period during the month of August. The S&P 500 was down 3.13% while the Dow Jones Industrial Average was down 4.45% for the month.

After Running of the Bulls

After the roaring bull market we’ve enjoyed since April 2009, it is natural for investors to question whether this is a turning point and the market is destined for a significant pullback.

Currently, it is valuable to remind ourselves that even through the woes of August, the S&P 500 is only down 4.5% from its recent all-time high.

Wall Street Writes

Additionally, it is useful to define some terms, as Josh Brown, one of my favorite Wall Street writers, recently did:

Percentage    Drop: Defined    As: Feels    Like:
less than   5% Pause “whatever”
5% to 10% Dip Refreshing
10%+ Correction Nerve-wracking
20%+ Bear Market Panic
50%+ Crash Can’t Get   Out of Bed

The Market Pause

You may have heard the word correction in the financial media lately. With a market pause still under 5%, it’s probably a bit early to start talking about a correction. Still, let’s assume we are headed for an actual correction, or a loss of 10% to 20%.

Expectations

What should we expect? Here are some interesting numbers that Mr. Brown accumulated:

  • Since the end of World War II (1945), there have been 27 corrections of 10% or more. Only 12 of these corrections evolved into bear markets (a loss of 20%+). The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 trading days to play out.
  • On average, the market has endured a correction every 20 months. Of course, the corrections aren’t evenly spaced out — 25% of the corrections occurred during the 1970′s, and another 20% occurred during the secular bear market of 2000-2010. However, from 1982 through 2000, there was just four corrections of 10% or more. This is relevant as it illustrates that bull markets can run for a long time without a lot of drama.
  • Since the stock market’s bottom in March of 2009, there have been two corrections. In the spring of 2010 the S&P 500 lost 16% over 69 trading days. In the summer of 2011, the S&P 500 dropped a hair over 20% before snapping back. Technically, this qualified as a bear market, which would mean the current rally is only two years old as opposed to almost five years old if dated from March of 2009.
  • The market pulled back 9.9% during 60 days in the summer of 2012. While not quite a correction, this dip set up one of the greatest rallies of all time.
  • There have been 58 bull market rallies (defined as market advances of 20% or more) in the post-war period, and they have run for an average of 221 trading days and resulted in an average gain of 32%. Comparatively, when measured by both length and magnitude, the current bull market is overdue for a correction and has been for awhile.

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Stock_Market

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Financial Action Plan

So what should you do assuming we are heading for a correction?

First, it is critical to remind yourself that if you are following sound financial planning principals, you already have an investment portfolio that matches your risk tolerance and investment time horizon.

Remember that just because the market loses 10% doesn’t mean your portfolio will lose 10%. In fact, if you scaled back the assertiveness of your portfolio as you transitioned into retirement and your portfolio is only 60% stocks, your portfolio would likely only be down approximately 6%.

Second, in the instance of an investor with a portfolio that is 60% equities, recall that you selected such a portfolio because you deemed a 6% loss to be acceptable. In fact, if due diligence was completed when you selected an asset allocation, you were aware that the largest loss a 60% stock, 40% bond portfolio suffered during the last 44 years was -19.35% (2008).

Additionally, you were aware that such a loss could (and likely would) happen again and you determined that was acceptable.

Grinding Teeth

Thus, for medical professionals and other investors who have done their planning, the best thing to do in the event of a market correction is grit your teeth and do very little!

For those doctors who haven’t planned in advance, now would be an ideal time to do your homework and create a portfolio that matches your situation and behavior patterns.

Assessment

Once you’ve done your planning, all you need to do is remember what Josh Brown calls the ABCs of investing: Always Be Cool.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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What Happens if the Stock Market Crashes – Doctor?

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There is No Investing Crystal Ball

Lon JeffriesBy Lon Jefferies, MBA CFP CMP™

As the Dow has risen greatly since March 9, 2009, some physicians and investors worry that the market is overheated and due for a severe pullback; as recently experienced very minor events have illustrated.

But, an opposing view is that the current price of the S&P 500 is comparable to its value in 1999, despite the fact that its earnings and dividends have doubled since that time, and suggesting the market has additional room to grow.

The Future is UnKnown

There is no crystal ball. What the stock market will do in the near future is anyone’s guess. As uncertainty is always a factor when investing, developing a portfolio that represents your risk tolerance and investment time horizon is critical.

Many physicians and investors realize they need to scale back the assertiveness of their portfolio as they approach retirement, but why is this important? The mechanics of an investment portfolio are very different for a portfolio in the distribution phase than for a portfolio still accumulating assets. If an investor is taking withdrawals from their account, it is much more difficult to recover from losses because distributions only serve to exacerbate the market decline.

crystalball2

Dr. Israelsen Speaks

As Craig Israelsen PhD points out in the February 2013 issue of Financial Planning Magazine with the following illustration, a portfolio enduring annual 5% withdrawals faces a much steeper climb back to break even after a loss than does an accumulation portfolio:

Clearly, the conclusion is if you are taking distributions from your account, or intend to do so soon, it is vitally important to avoid large losses. As it may be realistic for investors still accumulating assets to recover from a -20% loss by obtaining an average annualized return of 7.7% for three years, it is unlikely that a retiree taking distributions from his account will get the 16.5% annual return required for three years in order to recover from a similar loss.

Diversify

Protect yourself from unsustainable losses by maintaining adequate diversification within your portfolio. Bonds serve as a buffer against volatility and will likely decrease your loss during stock market corrections.

Additionally, ensure your portfolio has sufficient exposure to various asset classes: large cap, mid cap, and small cap stocks; US, international, and emerging market stocks; government, corporate, international, and emerging market bonds. Investing in multiple asset categories will protect your portfolio from a catastrophic loss next time a bubble in a market sector pops.

chart

Assessment

Speak with a Certified Medical Planner™ or fiduciary and physician focused financial advisor to ensure your portfolio is assertive enough to meet your retirement goals while maintaining an acceptable level of risk. If you wait for the market to turn before taking action, it may be too late.

www.CertifiedMedicalPlanner.org

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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