Recovering from a Market Drop

We all remember that time… the 2008 and 2009 market drop.  What a scary time that was for investors and even advisors, nationwide.  Now a few years later, we are hearing mutual fund investors ask, ”Have I recovered from those drops?”  Well here are some things we are seeing as we review client accounts.

Many investors are near a complete recovery, if the following happened:

  • Investors stayed in the market and did not try to “time out”
  • Investors maintained their investment allocation in equities at the same level of risk.  For example, a 75% stock investor prior to the drop stayed invested in practically the same equity allocation throughout this time.  Yes, changes could be made, but overall equity allocations remained about the same (No reduction in risk level, such as moving from Moderate to Conservative)
  • Investors did not redeem any sizeable amounts from their investments.  It was very important to maintain at least the same amount of shares as prices recovered.  In fact, as dividends and capital gains were paid out, investors who reinvested these amounts actually accumulated additional shares which proved to be very helpful in regaining lost ground as share prices recovered

We have also seen added benefits for investors who continued to invest (buy additional shares) during any significant market drops.  This is typically done best through “periodic investment plans” or automatic bank drafts, which takes advantage of an investment strategy called “dollar-cost-averaging”.

We hope this helps as you consider your situation.  Yes, some of the suggestions that advisors gave to their clients back during that ugly drop are proving true as time goes on, especially if investors stick to their game plan.

Understanding Dividends

On the heels of Apple announcing they plan to start paying dividends, I hope you find this information helpful and enlightening to your situation.

Most people understand “interest” from savings accounts and CD’s. But few truly understand dividends, how they work, and the benefits long-term. So let’s try to explain.

Simply speaking dividends are payments from corporations to their shareholders (investors of the company). Prior to each dividend, the board of directors declares the amount to be paid to shareholders. Dividends are usually paid quarterly and can be distributed in cash or reinvested to accumulate additional shares. Today you may find companies or stock mutual funds that pay reasonable dividends in the range of 2% to 4% each year.

Many investors prefer stocks or mutual funds that pay reasonable and predictable dividends. These dividends can supply a stream of income compensating the investor with some form of return, while they wait for a potential longer-term overall return.

Stocks that pay dividends can generally be less volatile than companies that pay no dividends. One reason for this is that the investor is compensated for their investment risks each quarter, through the dividend, rather than waiting long-term to receive any potential benefits of growth. Keep in mind this is a general principle and is not always the case for all stocks and mutual funds. Also, savings accounts and CD’s are typically guaranteed (FDIC insured) and stocks are not. This means that the investor can see fluctuations in the value of their stocks or mutual funds. Remember, past performance doesn’t guarantee future investment returns. That said, also remember that dividends can provide some benefit in the meantime while investors wait for longer-term potential growth.

What’s causing all the volatility?

Europe. But before we try to explain, let’s remember all the problems when we turned the corner into September. The markets were burdened with the possibilities of entering another U.S. recession, Europe had debt issues, there was a recent downgrade of U.S. debt, and it appeared our politicians in Washington were adding on more issues. Not to mention we were still dealing with supply disruptions and Japan’s economic fears caused by the Japanese earthquake.

Now it appears most of these fears, except Europe, have dissipated for the time being. Moreover the U.S. economy is showing some signs of growth, corporate earnings have held up fairly well, and the S&P 500 has regained 8.5% since the bottom on October 3rd according to Morningstar data.

So what is Europe’s problem? It seems the culprit could be the four letter word: Debt. More specifically, as the fallout from the U.S. sub-prime mortgage problems spread and economies around the world slowed, the so-called “PIGS” of Europe (Portugal, Italy, Greece, and Spain) showed signs of defaulting on their debt. Many believe the reckless, socialistic government spending of the past, as well as weak economies may have brought some other small countries into risk. And not being under one government rule, both the citizens and politicians in the stronger European countries (France, Germany, etc.) may not be willing to provide the necessary aid these countries require.

Yes, we have serious government debt issues in the U.S. As of recent we have seen our politicians “kick the can” down the road. The most recent occurrence of this was the Super Committee failure last week to provide significant helpful solutions.

Sure we could eventually be exactly where Europe is today, and with serious ramifications. However as for now, and excluding our government debt, our banks, consumers, and corporations have made significant progress since 2008 in improving their financial position and building larger amounts of cash to possibly weather another storm if it comes.

What could the European problems mean to our economy? On Monday’s CNBC broadcast, the discussion mentioned that the possibility Europe’s “pain” could actually be our “gain”. In other words, more foreign capital could find its way to the U.S. (via investments into the U.S. dollar and treasuries) and eventually make its way into our stock market. But more serious pains could rise up, according to Miles Betro of Fidelity Investments, should there be a major bank failure in Europe. He suggests that we could see another “Lehman-type” event that could trim as much as 1.5% off our economy (GDP). If this happens we could move right back into a new recession.

So when will this volatility end? The consensus among investment experts is no time soon. It appears it’s going to take more time and pain before days become a little more predictable for the markets. Please know we realize this may be a scary and even tiring time for investors to see markets drop 200 to 300 points in the matter of just a few minutes. If we may suggest a helpful “tip” remember that volatility can also work to the upside. Just yesterday we saw the DJIA up 291 points.

And finally, try to focus on what things will be like a year or two from now rather than the next day or even month. In other words, could the deals today be the catalyst for better performance down the road? We believe so, and look forward to that day! Is this not the true definition of an investor?

Another Melancholy September?

Wondering what might happen in the stock markets this month? Many think October (and some think August) is typically the weakest month for the Dow Jones Industrial Average. However, reading from the data, the chart above (Source: dshort.com) shows that September has historically been the weakest month since 1928. Additionally, according to dshort.com, September has averaged -1.3% in the DJIA since 1929.

Keep in mind history is not always a foreteller of the future. Consider last September in 2010 when the DJIA actually increased 7.7% (Source: Bloomberg). However that move could have been event-driven by the Federal Reserve “leaking out” in late August their intention to “flood” the markets with fresh money through QE2.

Only time will tell what will happen this September.

How We Are Seeing Things

Considering the most recent and possible trends, we want to update you on our position and how we see things going forward.

With the recent downgrade of U.S. debt, the political gridlock in Washington, continued deleveraging of global debt, particularly in Europe, and heightened consumer fears – it is possible that our economy could experience increased headwinds for some time. This could translate into slow to possibly even no growth, and continued volatile stock and bond markets. Therefore generally speaking we are tending to think a little more defensive going forward.

At this point in time we are hearing that the markets are “very oversold” meaning that we could see market rallies. If these happen, it is possible that they could be short-lived. So during any better times in the market, windows of opportunity could prove optimum times to make defensive adjustments, if needed.

Please understand we aren’t suggesting investors “run for the door,” so to speak. This reactive, fear-driven type of strategy often proves futile in the long run. Diversification studies show us that there will be asset classes that trend better for investors over others during specific periods of time.Also, we are hearing there are “pockets” of increased economic growth in certain “developing” areas of the world that is contrary to what we are seeing in the U.S. This being the case we will do our best to help clients sort through these facts to make wise investment decisions for their situation.

What you can do in the meantime…

  1. Stay calm and don’t panic. Remember, panic is not a strategy. It is a reaction. Be very careful how you are reading things, and try to be objective in order that you can make better decisions for your situation. It’s sad, but in times like these we hear and see new prognosticators that will try to predict “exactly” how things will turn out. No one can do this accurately every time! Also, friends and others will tell you what they are doing. Remember everyone’s situation is different (income, debt, goals, risk tolerances, background, family, etc.). So try not to “follow the leader” – it’s best to review your situation independently.
  2. Don’t do something emotional and stupid. In times like these advisors see clients do irrational things. You should already have a plan in place, and it’s important to remember that the plan is there for a reason – to help you stay on course. Making knee-jerk reactions can lock in losses (sometimes at significantly lower prices), and even have other consequences such as tax penalties, income or capital gains tax, and increased trading costs. In volatile situations people can feel overwhelmed, so it’s usually best to seek “wise, professional counsel”.
  3. Continue your 401-k and other retirement savings. Believe it or not, in times like these some people stop contributing to their retirement plan with the excuse that they don’t want to “throw good money away”.Remember these times – the market lows – are often the best times to continue buying. You could be getting more shares at lower prices while also continuing to reap the tax benefits associated with qualified retirement plans. It’s often what seems contrary or even wrong today that may benefit you the most in the longer-term.
  4. Re-assess your debt situation. It’s a good thing to pay down debt, especially higher interest rate debt. A good way to do this is to look for expenses you can reduce or cut out. Control emotional, impulsive buying decisions as you manage your spending plan. Also, consider the costs and benefits of driving your vehicles longer. Then take these savings and plow them right back into reducing your debt on a monthly basis.

It could also benefit you to refinance at today’s lower mortgage rates. We have recently heard rates are as low as 3.25% on a traditional 15-year loan, and 4.25% a 30-year fixed mortgage. Sometimes moving quickly and refinancing at reduced rates can allow you to use these savings to pay off your mortgage sooner. Also consider the advantages of reducing the term on your mortgage, such as reducing a 30-year to a 15-year period for more significant interest cost savings.

We will frequently review our “view of things” going forward and willperiodically note pertinent issues through our emails and blog – so please “like” us on Facebook or sign up for our Blog to receive ongoing updates.

In closing, during these more difficult times we will work hard to help sort through all the “noise” out there in order to help you make the right decisions for your situation.

 

The August 2nd Deadline

We all have learned it’s much better to make an “objective” rather than “emotional” decision. And with the national debt deadline less than a week away you may be wondering how the U.S. debt decision in Washington may affect you, your investments, etc. To hopefully help keep our thoughts rational and to try to “filter out” all the clutter (Fox News, CNBC, The Wall Street Journal, another Presidential speech, Congressman “political” posturing interviews, etc.), we are assembling questions to consider. Hopefully thinking through these questions will help you in your planning and to possibly help reduce some “hysterical” thoughts and knee-jerk tendencies to “fix it”.

1) Do our politicians and President have the guts and political muster to not compromise and place our Country in default? Would it be political suicide for some?

2) How long could a default last and what might it look like? (One Day, 1 Week, 1 Month, 6 Months, Longer)

3) Which is worse, a default or just a downgrade?

4) When could the markets begin to adjust for a default, what could it look like, and how long might it last?

5) What assets could be affected the least in a default? Which assets the most?

6) How could the S&P 500 Index behave (fluctuate like) in the following scenarios over the 1st day, over a month or more, or over a year or two:
— If a default is avoided…
— If a default and U.S. downgrade is avoided…
— If a default and U.S. downgrade happens, but is cured within a short period of time…
— If just a downgrade happens…

7) What might be the costs or benefits for an investor trying to “time” the outcome?
— If a default was prevented?
— If a default actually happens?

Posted by Randy Mascagni, CFP®

Mascagni Wealth Management — A Registered Investment Advisory Firm
205 E. Main Street, Clinton, MS 39056 — Phone (601) 925-8099 — Toll Free (888) 925-8099

Securities by Licensed Individuals Offered Through Investacorp, Inc.
A Registered Broker/Dealer, Member FINRASIPC.

Past performance is no guarantee of future investment returns.

Market Update 7/5/2011

Since our last Blog on June 7, the market has moved positively in spite of many predictors. This is while news headlines have reported repeatedly on Greece possibly defaulting on their debt, a possible slowdown in the US economy, as well as the U.S. debt ceiling problems in Washington. In fact, just last week the market was up 4%. And since our last post (June 7), see the changes below…

DOW Jones +1.1%
S&P 500 +0.3%
Nasdaq +1.8%
Note: June 7 close through July 1 close; Source: Yahoo! Finance

There is a saying that many times proves itself true… ”The stock market climbs a wall of worry”. What this means is that the stock market can go up in spite of lots of bad news. Since June 7 this appears to be the case.

Going forward on a short-term basis it’s impossible to predict the stock market. However, as far as the economy we could see some slow improvements caused by increased supply shipments from Japan since the earthquake (helping manufacturers such as auto, technology, etc.), and declining gas prices. Just this morning we have seen that Factory Orders released today for May showed a +0.8% improvement over April. We will keep our fingers-crossed hoping this slow-down is just a temporary “soft patch”.

Summer Update

With mid-2011 upon us, now may be a good time to provide an update on key economic issues and the market outlook. So let’s review the “macro” view of things.

If you will remember, last August the Federal Reserve announced their next strategy (QE2) to help support and possibly kick-start our slow economy. The markets read the potential positives of QE2, at least to the stock markets, and we saw the “best” September in years. The markets continued to rally through the end of the year and the mood of the consumer was more positive.

After the first part of 2011 we started getting more positive indicators such as increased retail sales (a good Christmas and consumers spending a little more), some signs of job improvements (even reports of companies hiring), and consumer confidence increasing. However mortgage interest rates rose and the housing sector was still showing signs of no improvement. Additionally gasoline prices at the pump jumped almost $1 approaching $4/gallon. It’s believed all the new money “sloshing” around in the economy created by QE2 found its way into the stock, commodities, and energy markets creating a “playing ground” for short-term speculators.

Now we are in the first of June, and we are hearing the economy isn’t doing as good as we had thought. For instance, economic growth (GDP) in the first quarter was only 1.8% (much slower than what the economy should be emerging out of a recession). Next, the jobs picture deteriorated again in May. And then finally the housing sector is extremely weak with some new price declines in some of the major markets (Florida, California, etc.). Remember up to this point we have been trying to restart our economy without any help from the Housing Sector, which is a very important part of our economy (construction, building materials, appliances, home furnishings, etc.).

So with all this being said, expect some version of the following this summer:

1) More, intense political wrangling and blaming from both sides. With Congress and the White House pushing the deadline to August to raise our nation’s debt ceiling expect more blaming and whining from our “adolescents” in Washington. When the deadline finally comes more than likely the debt ceiling will be increased with some compromise on government spending (but less than we need).

2) Gasoline prices. With the economy starting to signal a soft-spot, Europe continuing to have problems, and the emerging economies (China, India, Brazil, etc.) trying to contain their growth to minimize their inflation, it’s possible you may see noticeable gasoline price declines at the pump. In fact that appears to be starting to happen even now.

3) Mortgage rates. Mortgage rates have dropped again about 0.75% and credit-worthy people can now find 4.5% on 30-year fixed mortgages and 4.0% on 15-year fixed mortgages. This can actually become a great time for people to buy a home or refinance.

4) Volatile markets. Since the Federal Reserve’s QE2 program the markets have been very stable with lower volatility. In other words we haven’t seen many days where the DJIA dropped greater than 200 points. As the Federal Reserve unwinds QE2 you may see more volatile swings in the stock markets. So don’t be surprised and try not to let that scare you.

How are the markets going to respond to all of this? Well, no one knows. Remember everyone thought this past September would be horrible and it was the best single-month September ever for the stock market. Also keep in mind after the major crash of 2008-2009 and in a very, unprecedented scary time in our economic history the DJIA has gained 92.0% (3/9/2009 – 5/31/2011, WSJ).

Now I could speculate and you will hear others who will tell you “exactly” what they believe the markets will do. Further, you can go out and buy all the books you want telling you what’s going to happen both now and later. In fact if you like “horror or fiction” there are plenty new books written about America’s doom days ahead. But understand that we’ll only know “for sure” after it’s happened!

Yes, your investment allocation needs to be correct and needs to be reviewed and adjusted periodically which we will continue to do for our clients. But please try to not let this stuff scare you or cause you to “derail” from a well thought out investment plan. And if you feel the need to “time” your investments (in and out of the market), then let me direct you back to our blog to an earlier post titled “A Crash Overhang”.

So in summary, go about your life and enjoy it. Try not to try to react to what you are going to hear (or even try to fix). And this summer may be a good time to avoid the Business and News TV channels as they hype all the negatives.

Our Washington politicians say they worked very hard this weekend…

My wife asked me Sunday just how much is the agreed $38 Billion budget cut compared to what our federal government is spending (2011 budgeted spending is $3.83 Trillion). So to put this cut into its proper perspective according to what the U.S. Office of Management and Budget estimated for the 2011 U.S. budget:

+ Revenues of $2.57 Trillion
– Expenditures of $3.83 Trillion
= Deficit of $1.26 Trillion

So based on all these numbers this agreed upon cut is approximately a 1% reduction. So how much is that? Well that’s kind of like a couple that makes $75,000 per year choosing to eat out one less time per week. And if you’re like me, eating a couple less cheeseburgers per week would probably be a good thing and certainly not a sacrifice.

For some reason our congressmen (both Republicans and Democrats) may not realize that their electorate is more aware, knowledgeable and educated than ever before. Could the average American recognize a “spin” when they hear it? Below is a quote from Dennis Gartman in his financial newsletter on Monday, April 11th:

Both the Republicans and the Democrats have been out over the weekend touting this agreement to include ‘the largest spending cut in U.S. history.’ This is utter and complete nonsense for all they’ve done is cut back the even larger sum of spending they’d agreed to previously. If you agree to spend an additional several trillion dollars and then cut a few tens of billions from it, you can indeed say… hoping to keep a straight face in the process… that you’ve made the largest budget cut in history. Shame on these men and women. They embarass us all.

Getting your “Home Office” in Good Order!

Recently my wife hired a professional organizer to help organize my home office. My first thought was “I don’t need that”. The last couple years had been hectic, but I still knew where everything was located. And with just a little bit of motivation I believed I could get my cave back in good shape.

Yes, I am a detailed guy and my office keep’s good financial records for our clients. But I will admit my personal number of “piles” at home had grown to something that was not like me. I had grown tired keeping up the system myself. So… you guessed it. I shut up and off we went on “my wife’s” new project.

So how did it go? Well, when I came home for lunch I quickly noticed my “paper life” was under serious scrutiny. Personal papers and files were scattered all over the floor and much of my stuff was beginning to be questioned. But when I came home that evening something more positive happened. The clutter had been eliminated and I had a simpler, more organized system. In other words, the “garbage truck” needed to be empty the next time it showed up at my house!

More importantly, my wife shared that she learned a lot about me by examining my files, notes, and mathematical scratch. She said she realized the amount of stuff I manage, how my mind works, and my motivation to provide. It sounded like she was impressed.

Lastly, she felt good that she could locate our important documents and exhibited renewed interests in our files. And guess what – she offered to help me file and maintain our new system going forward. I thought, “Wow, that’s all positive stuff.” So let me briefly share the important points we learned during this exercise

1. Make sure it works for both. Our filing system needed to work for both of us. My spouse needed to know where our important documents were located and where to file each new item.

2. Keep it simple. A simple, clean, organized system can be easier to maintain and more appealing to the eye. All this can contribute to both time and money savings going forward.

3. Designate a tax basket. A basket can be used to collect the receipts and tax documents throughout the year. At the end of the day receipts in her purse and my pockets can be simply dropped in the tax basket. As needed, we can make short notes on each to make it easier to understand at tax time.

4. Use three ring binders. Information that is frequently needed or too bulky for a file folder can be organized in three ring binders. Categories like Insurance (home, auto, medical, life, disability, etc.), Estate (Wills, Power of Attorney, and Health Care Proxy, etc.), Home (manufacturers’ manuals, contractor info, paint colors, warranties, etc.), Financial Plan and Investments (annual statements, investment updates, etc.), Other (passports, birth certificates, employer handbook, children immunization records, real estate closing documents, vehicle titles, etc.) can be a starting point.

5. Get help. It can be hard to throw things away and to be objective with your stuff. Get help from a professional organizer who can give great ideas and provide a “catalyst” to make your filing system work for both of you.

In summary, I can see the time and money spent will reduce stress and save all of us time in the future. And at the completion of her project, I had to admit my wife was right again!