2024

Time for another entry in my annual list of things I'd like to see happen next year.  But first, let's see how this year stacked up to last year's list, with comments in ALL CAPS:

A rising stock and bond market.

STOCKS UP NEARLY 25%, BUT  BONDS FLAT.

That Vladimir Putin is purged as a leader.  Any mysterious and/or violent way is acceptable.

IT WAS A BIG ASK.

Newly remodeled bathrooms in my house.

100%

Me attending a major sporting event.

DOES A KANSAS BASKETBALL, NOTRE DAME FOOTBALL, OR INDY CAR RACE COUNT?

Elon Musk leaves Twitter, or I leave Twitter for another similar service.

NO BUT PROGRESS HAS BEEN MADE.

Drought relief for the western U.S.

NOT REALLY.

Me getting a golfing hole-in-one or eagle.

NOPE.

MAGA-death, and a crop of moderate presidential candidates for 2024 who aren't aged 70s or 80s.

UNFORTUNATELY, LOST GROUND HERE.

More acceptance and usage of plant-based proteins.

I SUPPOSE YES, BUT NOT AT ALL WIDESPREAD.

And now, my new annual list of things I'd like to see happen next year:

The demise of the MAGA movement via defeat of their candidates in the 2024 elections (repeat).

Streaming service mergers and resulting price decreases.

Downside my residence -- or in the alternative, have my trailer trash neighbors relocate.

Finally get my Real ID driver's license.

Delegitimization of the LIV golf tour.

Consistently avoid working on Mondays and/or Fridays.

More pay-at-the-table restaurants.

A new technology device or service I want but don't have

2023

I promised to be less optimistic in my last annual list of things I'd like to see happen next year.  For the most part, that turned out to be a good idea.  Let's review the 2021 list, with comments in ALL CAPS:

More mandates and life complications for the unvaxxed, making more of them get vaxxed.

I SUPPOSE MORE GOT VAXXED, BUT NOT FOR INVOLUNTARY REASONS

Cryptocurrency regulations.

CLOSE BUT DIDN'T HAPPEN, BUT IT'S A LOT MORE LIKELY NOW THAT BIGSHOTS LOST BIG MONEY IN THE BANKRUPTCY OF FTX.

Prosecutions and convictions of Trump administration / organization officials who had roles in the 1/6/2021 insurrection.

CALLING THIS A YES, BECAUSE ALTHOUGH IT DIDN'T HAPPEN YET FOR ADMIN FOLKS, IT DID FOR MANY OTHER INDIVIDUALS.

A Winter Olympics that actually happens.

CHECK.  BUT IT WAS SORTA BORING.

An executive order, at the least, to loosen federal rules on cannabis.

YES THIS DID HAPPEN, BUT IT'S ONLY A PYRRHIC VICTORY WITHOUT ACUTAL LEGISLATIVE ACTION.

A top-tier Minnesota Vikings football team.

12-3 AS I WRITE THIS, SO I GUESS IT'S A YES?

A loss of market cap and credibility for Facebook/Meta.

A GIANT YES.

Me playing golf at a famous course / resort.

NO.

A decline in residential home buying.

ANOTHER GIANT YES, THANKS TO HIGHER INTEREST RATES.

A repeat from 2020 – me traveling to the final four U.S. states in which I’ve never set foot.

75% YES SINCE I GOT TO 3 OF THE 4.  ONLY ALASKA LEFT NOW.

Now for my new annual list of things I'd like to see happen next year.

A rising stock and bond market.

That Vladimir Putin is purged as a leader.  Any mysterious and/or violent way is acceptable.

Newly remodeled bathrooms in my house.

Me attending a major sporting event.

Elon Musk leaves Twitter, or I leave Twitter for another similar service.

Drought relief for the western U.S.

Me getting a golfing hole-in-one or eagle.

MAGA-death, and a crop of moderate presidential candidates for 2024 who aren't aged 70s or 80s.

More acceptance and usage of plant-based proteins.

Opposite Day(s)

The coronavirus is spreading across the continents.  The stock market and interest rates are tanking.  This is a good time for some perspective (on the markets, not on the virus).....

When stocks decline sharply, the steady flow of negative news reports drives many people to flee the markets out of fear -- and miss out on potential gains as financial markets inevitably regain their strength over the next few months and years.

Right now, we're actually going through the third(!) stock market drop of 10% or more in the past 13 months.  The other times, as well as all of the other times before that, the markets recovered and went on to new highs.  Yet people are still fearful.

So how do you keep the fear from prevailing?

Simple.  Long-term investors should do the opposite of what they want to do.  That is, instead of watching the markets and reacting, they should ignore the markets and do nothing.

It's OK to not check your investment / 401k / 403b account balance when the market is falling.  It’s also OK to not watch or listen to financial news.  In fact, turning off the financial news is the smartest anyone can do if it keeps them from making mistakes based on emotional decisions.

The real contrarians will actually do something -- they'll buy into the falling markets, and of course, sell into the gaining ones.  They're the smart ones.

Be smart.  Be brave.  Be opposite.

2016

It's once again time to review my 2015 list of things I'd like to see happen, and lay out my hopes for 2016.  Here's the 2015 list, with new notes in ALL CAPS:

-Less glorification of big butts.
I'M DECLARING VICTORY ON THIS, BECAUSE IT MOVED FROM A 9 TO AN 8 ON A SCALE OF 1-10.

-A Final Four for Iowa State men's basketball, and an NCAA tournament berth for both Iowa and Northern Iowa men's basketball.
OH, SO CLOSE.  THAT IS, IF YOU CAN CALL ISU LOSING IN THEIR FIRST NCAA TOURNAMENT GAME AS A 3 SEED 'CLOSE'

-More action, less inaction by the U.S. Congress.
A PERPETUALLY WASTED HOPE.

-Stephen Colbert dominating late night television, with Conan and Fallon and Stewart right behind.
OTHER THAN JON STEWART RETIRING, I FEEL THIS IS STARTING TO HAPPEN.

-Common use of Apple Pay.
NOT AS COMMON YET AS IT SHOULD BE.

-Might as well go for it again -- at least medicinal marijuana legalization in Iowa.
C'MON, MAN! PROGRESS IN SOME OTHER STATES, BUT NOT IN IOWA.

-A vaccine against Ebola.
DID NOT HAPPEN, STILL WORKING ON IT.

-A week-long vacation for me.
DID NOT HAPPEN, STILL WORKING ON IT.

For 2016 I'd like to see:

At least some progress, not regress, on medicinal marijuana legalization in Iowa.

Chris Christie versus Hillary Clinton for president, with ? winning.

A higher stock market.

Just one actual, even very minor piece of legislation to make it slightly more difficult to buy a gun.

The personal, financial, and political implosion of Donald Trump.

A way to charge devices without a wire.

An à la carte option for cable and satellite TV channels.

More time for eating right, less time for exercise.

Be Greedy When Others Are Fearful

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful."  --Warren Buffett, October 2008

This quote about investing in stocks may be many years old, but it applies like new based on the last 10 days of stock market trading.

A downturn in the investment marketplace creates a natural fear for even the most experienced investor.  When something is cutting away at our net worth, we want to stop it as soon as possible.  We want to do something.

Here’s the problem:  Leaving the markets in that environment is generally a bad idea, because it’s done out of fear.  People make the biggest investment mistakes when they’re fearful.  It’s even more powerful than greed, and there's proof.

Daniel Kahneman is a research psychologist, but he won the 2002 Nobel prize in economics for his work in an area now referred to as behavioral economics.  His research reveals that the response to a price drop generates a much stronger emotion than a response to an equal price gain.  In short, he found that most people fear loss much more than they enjoy success, and this makes fear a powerful enemy of an otherwise level-headed investor.

If we feel the urge to reduce our stock or bond allocation during a market downturn, our challenge is to recognize Kahneman’s observation.  We need to remember that we picked our asset allocation target during a period when we weren't emotional, and did it for good reason.  We must also remember that short-term market movements are of little-to-no consequence if we have a long-term investment horizon.

That said, we should do something during a big market correction -- but not leave the market.  Rather, we should rebalance to our pre-chosen allocation target, effectively buying more stocks or bonds at a time when we may fear it most.  Then later, when those markets inevitably recover, we should try to enjoy our success more!

(Un)American Pickers

First, a lesson on stock dispersion in investing.

Low stock dispersion means that stocks are generally moving in the same direction. High stock dispersion means that individual stocks are headed in more unpredictable directions, as has been the case so far in 2014.  While the so-called financial experts are always calling it a ‘stock picker’s market’ (because they make money on trading), they are louder about it during those periods of high dispersion.

If stocks have low dispersion, presumably an active stock picker should find it more difficult to beat a relative benchmark index.  Conversely, when stocks are acting more independent of one another, there should be more opportunity for skillful (or lucky) investors to outperform.  Of course, there is also a greater opportunity for the less skillful (or unlucky) investor to underperform.

A new study titled Dispersion:  Measuring Market Opportunity, by S&P Dow Jones, suggests there is no evidence to support the notion that stock picking is easier or better done when there is wide dispersion among individual stock returns.  In fact, the data suggest the probability that actively managed mutual funds will outperform the market (already a less than 50% chance after expenses) is no higher during periods of high dispersion than low dispersion.

It all makes sense.  Why should a greater percentage of active fund managers outperform during periods of high dispersion?  Their skill doesn't suddenly increase during these periods.

Money managers who masquerade as financial advisors have lots of marketing ploys they use when promoting their services, and saying it’s a ‘stock picker’s market’ is among the most used.   But the truth is the same as always – there’s no extra benefit to the guesswork of active management.   Use a passive, index-type approach to investing, and you’ll be farther ahead in the long run.

The Investment Wallflower

Nearly every conversation about the investment marketplace focuses on the stock market.  From the media to financial advisors to investors, the bond market has long been an overlooked wallflower at the proverbial investment dance, even though it has experienced exceptional risk-adjusted returns over many years.

However, the bond market is currently the one that deserves attention.  After a decades-long run of falling interest rates (and thus bond prices rising), bond yields recently have risen sharply, negatively impacting those portfolios with significant exposure to what many consider a ‘safe’ investment.

Generally speaking, the bond market works like this:  As demand rises for less risky investments, bond prices go up.  If you are a bond issuer, such as a government or a corporation, heavy demand means you can get away with paying a lower yield.  Borrowing gets cheaper, with a hoped-for side effect of economic stimulation.

After the 2008 financial panic, bond prices rose to a great degree because the U.S. Federal Reserve started buying billions of dollars of government-issued debt.  Without this central bank action, demand surely would fall, and issuers would be forced to pay higher rates, potentially stifling an economic recovery.

In the past several months, uncertainty about when the Fed might taper its purchases caused a broad selloff in bonds.  Yields climbed rapidly, and fixed income investors suffered losses.  Note that nothing actually changed; rather, the bond market reacted in a volatile way to the mere perception of a change.

No one knows exactly when the Fed will decrease its government bond purchases, but fortunately, we don’t have to know to have a good investment outcome.  A successful investment portfolio doesn’t come from market timing – it comes from a low-cost, risk-appropriate mix of stocks and bonds based on time horizon, with disciplined rebalancing to that mix as necessary.

Managing bond risk is no different than managing stock risk, in the sense that emotion-free decision-making is critical.  The bond market wallflower may suddenly want more attention, but that doesn’t mean you have to change how you dance. 

Silver Anniversary Of A Crash

The stock market was down just under 2% today, Friday October 19th.  Not a good day, but relative to 25 years ago, a GREAT day.

I recall October 19, 1987 quite well.  That was the day the Dow Jones Industrial Average dropped over 500 points in one day, which at the time was over 20%.  Think about that - a similar drop today would mean the Dow would fall over 2500 points!

Can you imagine the near and maybe real panic that would cause today, in the U.S. and around the world?  People would be non-functional.  At least the 40+% drop in the stock market in 2008 was more of a cascading crash, since it happened over the course of many weeks/months.

25 years ago, I was less than two years out of college, working an entry-level job setting up 401k plans for employer-customers at Principal Financial Group in Des Moines.  Oh, and I had just found out we were expecting our first child.  But I never felt like I was in danger of losing my job - if anything, there may have been more job security.  Principal needed more help after that, as the 'yuppies' of that generation suddenly concluded they should be saving more money (inside a 401k plan was one way) instead of spending every dime they made.

Looking back, one of the crazy things about that day was we were not in the 24-hour news cycle that we are today.  We weren't following the crash using TVs or the internet (the what?).  We just got periodic updates throughout the day, near the end of which we learned of the 500+ point drop.

One of my favorite stories from that day actually didn't happen until the next day, when we were ushered into a meeting with some Principal executives, who told us to tell employer-customer not to be alarmed, it was 'business as usual' there - except now we weren't going to do this, or this other thing, or that, or that other thing. In other words, it was the opposite of business as usual.  Clueless morons!

In the end, the market and the economy came back stronger than ever, setting up the 90s for another big bull run.  Is that why people think the current recovery seems non-existent - because it isn't happening fast enough?

Seeing Patterns Where None Exist

Although some very bright people may try to convince you otherwise, the investment marketplace follows no predictable patterns. If it did, the so-called experts would tell you exactly what and when to buy and sell, and you’d never have to worry about money again.

To better illustrate the difficulty of predicting market moves, let’s take a closer look at typical investor logic, using the parallels between gamblers and investors who try to time the market. Like many investors, gamblers tend to rely on hunches and perceived patterns to determine their next move.

For example, a person flipping a coin who gets ‘heads’ five times in a row might believe there is an increased probability that the coin would land on ‘tails’ with the next toss. Others may think that ‘heads’ is on a hot streak and believe it is more likely for that to continue. But in fact, the odds of the next toss being ‘heads’ or ‘tails’ is 50/50 – no different than for any coin flip.

Investors tend to take similar approaches to the stock market. Rather than setting a strategy, they are often gambling on a certain streak, typically one they believe is going to continue. For example, in the early 1990s, investors bought billions of dollars in vastly overpriced dot-com stocks, simply betting those stocks would continue to move dramatically higher. Ultimately, that market crashed and investors holding those stocks were saddled with significant losses.

More recently, the real estate market seemed to be on an endless upward cycle; people bought property, and counted on the value endlessly climbing. But in the past few years, that myth was exposed, and the real estate market tumbled along with economy as a whole.

The lesson here for investors is to realize that we have a human tendency is to see patterns where none exist, and to ignore those perceived investing patterns. With this awareness, one can increase the probability of investing success by avoiding the guesswork of active management, and establishing a very low-cost and diversified portfolio that can perform well in many different types of markets.

Headline News

For the twelve-month period ending June 30, 2011, while the global economic news was mostly cloudy, equity investors enjoyed the equivalent of blue skies. Most developed and emerging-country stock markets had positive double-digit returns, some in excess of 30%.

If someone knew a year ago that global markets would stage such a broad-based rally, one would have assumed that trends in employment, housing, and financial distress were about to take a pronounced turn for the better. In fact, they have done nothing of the sort.

Somehow, despite gloomy financial page news that kept repeating itself, equity prices marched substantially higher.

Now, as equity prices have turned lower in the past month, and have become especially volitile in the past several days, the financial pages are again full of dire forecasts. Really, if you compare the headlines, it's just like last year.

No one knows if the stock market will react differently this year to similar news. Based on last year, however, we know one thing for certain – markets do not base their movements on proclamations from the financial media!

Remember the bottom line: Due to unforeseen events, no one can accurately predict the direction of markets. Rather than react to stormy news, you should act on what's already known, and consistently keep your financial plan and asset allocation both cost-effective and aligned with your risk tolerance.

No Time For Timing

Most investors who want to move their funds out of the stock market regard their potential action as a temporary move to the sidelines, rather than a permanent decision. Their proposed strategy is to “time the market” and attempt to ride out the storm in the shelter of the harbor, only to set sail again when the weather improves.

The volatility of the past quarter has once again led some down this market timing path, but there are obvious problems with this tactic. Perhaps the main one is, once an investor decides to leave the stock market, exactly when should they return?

Investors may believe it is prudent to wait for economic stabilization as a sign the stock market will recover. However, the market is typically a leading – rather than trailing – economic indicator. So by the time the weather appears clear from the harbor, the tide may have already gone out.

In truth, correctly timing your exit and entry to the stock market is sheer luck. If it were as simple as some claim, millions would be doing it and getting very rich in the process, promoting themselves and their timing strategy.

Consider this: How many so-called investment experts correctly got out of the stock market completely by October 2007 and moved into government bonds, then bought back stocks again in early March 2009, and then reversed course back to cash and bonds again in early 2010?

The short answer is, NONE. Most investors who played the timing game left the stock market between October 2007 and March 2009, and then re-entered later in 2009. They sold low, bought high, and felt miserable in the process.

As I’ve stated many times, no one can predict the future, and no one should attempt to time the stock market. By maintaining a long-term strategic asset allocation (the amount split between stocks/bonds), and practicing disciplined, periodic rebalancing, investment decisions can be based on personal needs and risk appetites, and not on the emotion of the moment.

Uncertainty will always be an integral part of investing (and life). No one has or will come up with a consistently successful strategy for timing the market, and investors would be much better off focusing on things they can control.