In April of 2011, I wrote:

My job is to help you separate fact from fiction and lay out a game plan for you and your family that will ensure your personal and financial security in the unstable and unsettling times that lie ahead. The broad battle plan that I’ll cover over the next few months will include the complete scope of the energy consumption/investment/personal security issue. Here is what separates what you read from me from most others: (A) I have no financial axe to grind and no ulterior motive. (B) I am not looking to make any new friends or curry favor. I am not, not surprisingly, a politician. (C) I do not work for a Wall Street investment firm with something to peddle. (D) I tell you exactly what I have done for my family and for myself and what I plan to do over the next couple of years.

I do not have all the answers, but I do have some good ones and a battle plan that will make us all more secure financially and personally. I say this to you with the enthusiasm of someone who has been researching and plotting financial strategies for nearly five decades. My strategies are suitable for all investors, but most specifically for my private management clients who are predominately conservative small-business owners and retired, or soon-to-be retired, investors. This group tends to be one that, over many decades, has accumulated substantial capital. Today the goal is to protect that capital and maintain purchasing power through all types of weather.

If you have ever ridden a motorcycle through the Dakotas, Wyoming, or Montana, you know full well that betting on the weather is a bankrupt strategy. Prepare ahead as if you do not know what is ahead, and with plenty of concern for the unknown. Have your foul-weather gear and full-face helmet on from dusk till dawn, because conditions will change without warning and become violent in a flash. Of this I am certain. Do not be a bettor, be a planner.

There is no way gambling in securities markets can prepare an investor for the devastating effects of a bear market like those seen this century. Only a systematic approach, that of a planner, not a bettor, can provide some shelter during hard times in the markets. If you would like to discuss a plan for your investments with a professional who puts your interests ahead of their own, please fill out the form below. You will be contacted by a seasoned advisor from my family run investment counsel firm, who will discuss with you ways to improve your investment plan.

With over 100,000 miles of Harley touring behind me, I can assure you of the value of a smooth ride. No one enjoys being jolted and jarred, not on the road or in securities markets. When markets become volatile, every investor is looking for smoother performance. In August 2013 I explained that the key to smooth performance, whether on the road or in markets is counterbalancing. I wrote:

Managing a common stock portfolio takes— above all else—patience. Your goal should never be what to sell next; rather, it should be what stocks you can hold through thick and thin. It is true that portfolio activity, for most investors, runs inversely to consistent long-term performance. How should you measure performance and how should you construct an all-weather portfolio? First, “all-weather” means you do not want to be jumping in and out of the market attempting to predict bull and bear markets. For five decades, I have been investing my own money as well as advising conservative investors saving for retirement. As such, I have invested through many gut-wrenching bear markets and disastrous single years like 2008, which ended with the speculative non-dividend-paying NASDAQ down a frightening 40% for the year. Through all the years of turbulence, I have remained fully invested in a balanced, widely diversified securities portfolio featuring a counterbalanced approach.

I have firsthand experience of what happens when counterbalancing is not in force. The Harleys I rode back in the old days had engines bolted straight to the frame. Talk about vibration and calamity. The constant vibration caused nuts and bolts to loosen and fall off. When you’re on a long-distance road trip, a breakdown in the middle of nowhere is cause for concern. I have found myself in just such a situation and it’s no fun. Today’s Harleys feature counterbalanced engines offering both a smooth ride and a minimum of road trip calamities.

Examine your portfolio today to see if it can be described as fully invested, balanced, and widely diversified. If not, it’s time to trade it in for a new model.

Securities markets endure any number of threats each day. Sometimes news that appears dire isn’t necessarily so. Other times, the market overlooks the little signals that portend a rout. After the 2005 revaluation of the yuan by China, I discussed how such seemingly small developments could create major change via the “butterfly effect.” I wrote that September:

I’ve written over the years about Chaos Theory, a subject on which I have read extensively. Of the scads of neat books on Chaos Theory on my shelf, I would send you first to Chaos—Making a New Science by James Gleick (author of the Life & Science of Richard Feynman). In his prologue, Gleick tells us, “When the explorers of chaos began to think back on the genealogy of their new science, they found many intellectual trails from the past. But one stood out clearly. For the young physicists and mathematicians leading the revolution, a starting point was the butterfly effect.”

Richard Feynman (groundbreaking research for the atom bomb, a Nobel prize for this theory of quantum electrodynamics, and his shocking expose regarding the Challenger space shuttle disaster) once said physicists like to think that all you have to do is say, these are the conditions, now what happens next?

Errors & Uncertainty

Gleick writes, “By the seventies and eighties, economic forecasting by computer bore a real resemblance to global weather forecasting. The models would churn through complicated, somewhat arbitrary webs of equations, meant to turn measurements of initial conditions (i.e., a yuan revaluation) atmospheric pressure or money supply—into a simulation of future trends. The programmers hoped the results were not too distorted by the many unavoidable simplifying assumptions. If a model did anything too obviously bizarre— flooded the Sahara or tripled interest rates—the programmer would revise the equations to bring output back in line with expectations. In practice, econometric models proved dismally blind to what the future would bring, but many people who should have known better acted as though they believed in the results…. Computer modeling had indeed succeeded in changing the weather business from art to science…but beyond two or three days the world’s best forecasts were speculative and beyond six or seven they were worthless…the butterfly effect was the reason. For small pieces of weather—and to a global forecaster, small can mean thunderstorms and blizzards—any prediction deteriorates rapidly. Errors and uncertainties multiply, cascading upward through a chain of turbulent features, from dust devils and squalls up to continent size eddies that only satellites can see.”

Gleick offers perspective that helps clarify a number of issues for us. (1) “A butterfly stirring the air today in Peking (now Beijing) can transform storm systems next month in New York.” Think of China’s mini yuan revaluation as the butterfly flapping its wings, and contemplate the future with considerable reservation. (2) Ponder the head faking of today’s complex hedge funds, and ask yourself how the butterfly effect may be the logic behind the explosion of multitudes of these highly leveraged time bombs.

Markets are stirring today. If you haven’t already counterbalanced your portfolio with a mixture of interest paying investment grade bonds and dividend paying, blue-chip stocks with long records of increasing dividends, I encourage you to do so. If you aren’t sure how to proceed, and would like to read more about such a strategy, sign up for the monthly client letter produced by my family run investment counsel firm, Richard C. Young & Co., Ltd. You can sign up here, and it’s free, even for non-clients. Don’t wait for chaos, prepare for it.

In 1999, most equity investors thought they couldn’t go wrong. Anything they bought simply gained in value. Easy, right? Not so fast. Soon, many Americans were facing a retirement disaster of their own creation. In July of 2004 I wrote:

You’ve Lost 37%…

Treasuries are boring! Right? You may be in the boring, boring camp, as are many investors. I hear Treasuries described as boring all the time. And yet I wonder what it is that is just so boring about a security that has no credit risk, no stock market risk, and offers a steady flow of cash. Furthermore, the U.S. government 100% guarantees all interest rate payments and timely return of principal at maturity. Well just for the heck of it, I looked up the word “boring” in my mini Webster’s Pocket Dictionary. Tiresome is used to describe boring. Let’s see…tiresome? Do you equate a steady flow of risk-free cash and a 100% guarantee of your principal as tiresome? I sure don’t.

The Fuddy-Duddy and the Scold

Let’s dig a little on the boring/tiresome front. Let’s say you retired at year-end 1999, after having some good years in the stock market. In fact, after the spectacular stock market run of the late 1990s, you may have considered yourself a pretty shrewd stock market investor. Many investors, consumed with aggressive investing, had literally gotten smart overnight, or so they thought. Dividends were disdained. Warren Buffett had almost morphed into a tedious fuddy-duddy. The father of value investing Ben Graham’s margin of safety principle was gathering more dust than a stack of Brenda Lee records. Mr. Mutual Fund Jack Bogle’s table pounding on low fees and mutual fund integrity had turned this revered pioneer into a silly old scold.

So as 1999 came to a close, you packed away your gold watch and stepped off the commuter train for the last time, here’s what no doubt unfolded, if not for you then for a big percentage of your cohorts in the retirement class of 1999.

Retirement Disaster

Armed with newfound aggressive stock market success formulas of the 1990s, you assembled a portfolio of equities, 50% NASDAQ and 50% S&P 500. No boring U.S. Treasuries and the like for you. In fact, no fixed income at all. After all, how could market-beating mid-teen growth be racked up with fixed income? Fixed income was for old people, right?

OK, let’s see how the retirement class of 1999 has done. Oops, in the nearly five years since retirement, a portfolio of 50% NASDAQ/50% S&P is down by 37%. Now I have not included dividends here, but little in the way of dividends is offered by the NASDAQ and S&P, so let’s not quibble. Far more serious issues are at hand.

A Life’s Savings Down the Rat Hole

If, for example, you had an equities portfolio worth $1 million at year-end 1999, it now would be worth $610,000. As a retiree, drawing my mandated 4% (today’s max) would give you $24,000 annually, versus $40,000 at retirement. That’s a nasty jolt to a retirement standard of living. But no sweat. Stocks will roar back, right? They did roar back. My numbers are post last year’s charge. These truly depressing numbers are after an enormous comeback in 2003. Most equities today are once again on a downward slope.

It turns out, that sometimes it’s better to be a fuddy-duddy. If you aren’t sure how to build a portfolio that seeks to protect you in times of market turmoil, please fill out the form below. You will be contacted by a seasoned member of the investment staff at my family run investment counsel firm. They will give you a free portfolio review and explain some changes you could make to better achieve your goals. Building a strong investment plan and working to achieve its goals can help you avoid sending your life’s savings down a rat hole.

There’s a lot you can’t control when you’re investing. Putting your money in securities necessitates some risk taking. You probably aren’t managing the companies you own, or the governments you lend to yourself, so you have to trust managers and politicians to do that. And you’ll never direct consumers and taxpayers, so revenue streams are completely out of your control. There are though, things you can do to put yourself on sounder footing. In July of 2004 I wrote:

Compound Interest and You

Here’s a compound interest story that should help you and your spouse. Let’s assume a hypothetical $10,000 investment with a 7% annual return for 20 years. Investor A draws the 7% ($700) each year for living expenses. At the end of 20 years, the original $10,000 in capital remains in place, and $14,000 in simple interest has been drawn for living expenses. The end value in capital and interest drawn is $24,000. Now let’s assume hypothetical Investor B invests the same $10,000 at the same 7%, but draws nothing and simply let’s the money compound for 20 years. Well, $10,000 compounded at 7% for 20 years has an end value of $38,696. You will see that $14,696 ($28,696 – $14,000) represents interest on interest. Over half of the long-term total return for Investor B reflects interest on interest. Unfortunately, compound interest is not a concept that is well understood by most investors.

To their everlasting sorrow, most investors not only lack a basic knowledge of compound interest, but also lack patience and dividend/interest religion. Many are greedy, trade way too often, and are in debt. For the record, I have no debt. I buy for cash. I have never employed margin and tend to own the investments I make for a long, long time.

So the three traps I explained that can harm your investing success are

• Being greedy
• Trading too often
• Being in debt

Greed will inevitably ruin your patience. Trading too often will generate fees you can’t afford. And using debt to buy investments, while not a mortal sin, can turn your gains into losses so fast it’ll snap your neck.

Focus your investing on compounding, and work to avoid the three traps.

The S&P 500 500 index closed at a record high yesterday, and could do so again today. Back in June of 2004 I was telling readers about how to position their portfolios when stock prices rise well above trend. I told them then that they had two jobs in preparing for such lofty stock prices. I wrote:

So what is your plan during periods when stock prices rise well above trend? You have two jobs. First, be sure your exposure to equities does not exceed what, for you, is a conservative and appropriate level. Second, place more emphasis than normal on dividends. Look to maximize yield. And by all means, confine your list to conservatively managed and financed businesses where you have a margin of safety. Balance sheets with little or no debt have strong appeal during such periods. Cash is king. As my chart on dividend yield shows, most stocks do not offer much in the way of yield. What is proper weighting in stocks for you? Well, take a look at my Efficient Frontier chart. The farther you go to the right, the better your returns with ever-greater risk. The farther you go to the left, the less risk along with lower returns.

Click image to enlarge.

#1 Is Risk Management

I, of course, do not know what your level of comfort is or your time frame of reference. If you are retired or soon to be, your eye toward risk must be intensified. Risk management is the first order of military engagement and, perhaps shockingly, must be the first order of business for investors. In my own case, I spend a lot of time gauging risk and little time appraising upside potential. My upside gains are a product of the time value of money. I rely on patience and the relentless compounding of interest and dividends.[…]By diversifying over a quality list of balance-sheet-strong dividend payers and eschewing trading, long-term results are pretty much baked into the cake.

I was focused then, as I am today, on risk management. Remember your two jobs: 1) achieving proper portfolio balance, and 2) focusing on dividends. If you need help crafting such a portfolio, request a free consultation with a member of the seasoned investing staff at my family-run investment counsel firm, Richard C. Young & Co., Ltd. by clicking here. Once contacted, you will be guided through a no-obligation review of your portfolio by an experienced professional.

 

There’s a saying in finance that you shouldn’t fight the Fed. What that means generally, is that if the Fed is encouraging riskier or less risky behavior with its policies, you should go along.

But what happens when the Fed is giving mixed policy signals? The Fed increased rates as recently as December 20, and was discussing further hikes even later. Now, in June markets see the Federal Open Market Committee signaling two possible rate cuts in 2019. That’s a neck snapping change of course.

Such turnabouts aren’t new for the Fed though. Back in April 1995 I wrote:

In recent testimony to the Senate Banking Committee, Fed Chairman Greenspan told the committee that the economy is slowing. He indicated that rates may have peaked and in fact soon could reverse to the downside.

Greenspan’s report, I believe, was a politically based oddity. Not two weeks earlier in a speech in Honolulu, Greenspan said signs of a slowing economy were scant and inflation pressures remained worrisome. Had conditions changes so much in a matter of less than two weeks? Of course not. Mr. Greenspan was playing politics pure and simple. He wants to be renominated for a new term as Fed chairman.

I’m not suggesting the Powell-Fed is playing politics today, but I am suggesting that you must prepare yourself for rapid changes in Fed policy. You must develop an investment plan resilient enough to withstand Fed shocks. My favored strategy for doing so is building income producing portfolios that seek to avoid risk where possible. If you haven’t already developed a similar investment plan, I suggest you do so today.

For the over five decades that I have counseled individual investors like you, I have consistently advised the ruthless elimination of emotionalism from one’s financial affairs. Emotionalism is an investor’s meanest foe.

How do you eliminate emotionalism from your investment decisions? There are many facets to emotionalism, but as I wrote to my investment strategy report subscribers twenty years ago, one simple way to defeat emotionalism is to take a more hands-off approach.

Events of the moment should never be part of the investment mix. I price my portfolio once a year at tax season (because I must). Beyond this tax-related housekeeping chore, I pay little attention to prices. Most of what I own, I have owned for a long time. I know how things are going month to month and find it counterproductive to rustle through my holdings regularly. You’ll be amazed at how comfortable you can become with a hands-off approach. You sure as heck will pay a lot less in commissions and taxes. And you will defeat what is every investor’s meanest foe—emotionalism.

Some may scoff, but for many, the seemingly innocent act of tracking daily portfolio fluctuations can trigger the type of emotionally charged investment decisions that sabotage portfolio performance.

I have learned that through decades of in the trenches work with investors, but academic studies also show that the more often an investor reviews his holdings, the less likely he is to craft a return-maximizing portfolio.

A hands-off approach remains the mandate today.

Originally posted May 25, 2018.

You cannot possibly save properly for retirement without a thorough comprehension of the miracle of compound interest and the value of time.

I like the materials Vanguard has prepared to introduce the risk, reward and time theory to retirement Investors.

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You will be glad you did.

Last week I explained that I don’t miss the boat because I’m always in the boat. The post was an outline of my long-time philosophy for remaining fully invested so as not to miss the best times of market performance. My avoidance of market timing isn’t simply intuitive. In fact, in December 1991 I detailed some of the research on which I based that philosophy. I wrote:

Your Biggest Mistake in Investing Is to Market Time

You don’t want a fund that is an active trader. Market timing does not work; it’s a fool’s game. Forbes presented one version of the case well in its issue of 28 October 1991. The article explains a study done by professors Chandy and Reichenstein. The study examines monthly stock returns for the S&P 500 from 1926 through 1987. It found that “if the best 50 months­—only 6.7% of the total time period—were deleted, the S&P’s entire 62-year return disappeared.”

The Ibbotson studies covered market return from 1946-1990. They showed that $1 invested in stocks in 1946 grew to $130.52 in 1990. If, however, the 30 best months were taken out, $1 grew to $8.88 versus $8.43 for T-bills. Stocks barely beat T-bills over 44 years, without those critical 30 months.

Do you now see how terribly dangerous it is to be on the sidelines during the precious few really good months in the long, long stock market cycle? You, I know, intuitively believe that you can market time, or at least that Dick Young can for you. It ain’t so. The biggest mistakes I’ve personally made in the market have been being on the sidelines at the wrong time.

Selling out into cash is not the best action investors can take to prepare their portfolios for times of turbulence. Instead they should seek to develop a diversified portfolio that attempts to minimize and counterbalance risks in order to ride out volatility.