Market Summary: November 2019

Positive news boosts stocks.

What happened.

November was a good month for stocks, especially domestic stocks. Large-cap US stocks led the pack, returning 3.63 percent (S&P 500). Small caps were up 3.06 percent (S&P 600). International stock returns were not as impressive. Developed-market stocks rose 1.13 percent, but emerging-market stocks fell by 0.14 percent (MSCI EAFE and Emerging Market indices). Interest rates crept up and so bonds fell slightly. The Bloomberg Barclays Aggregate Bond Index fell 0.05 percent. As for volatility, November was a quiet month with no big swings in US markets. The S&P 500 didn’t move by more than +/-1 percent on any day.

Why it happened.

There were three main factors pushing domestic markets: trade, earnings and economic news. The long-running uncertainty over a U.S./China trade deal continued, but most of the November news suggested an agreement was in the cards. November closed out the third-quarter earnings season (when companies report their financials for the previous quarter) and the news was good: Three-quarters of the companies in the S&P 500 beat their earnings forecasts (Remember, stocks react to new information, not to what’s already expected). Finally, there was positive economic news on job-creation, inflation and sales of new homes among other things. However, the data on consumer confidence and personal income wasn’t as good.

Overseas the news wasn’t so positive. The upheaval in Hong Kong continued, hurting its economy and stocks and pulling down returns on emerging markets. And, although there was some positive economic news from the eurozone, the fall in the value of the euro relative to the dollar (making euro-denominated assets worth less in dollars) weakened the return to U.S. investors.

What this means for you.

At Financial Engines, we build portfolios that are individually built for you. November saw stocks, which are historically riskier than bonds, perform well. If your portfolio has higher risk, because you are far from retirement or have told us you are comfortable with higher risk, your portfolio will probably have risen. If you have a lower-risk portfolio, you will likely not have seen as much growth. It is important to realize that regardless of how the markets behave, your investments should reflect your personal goals and tolerance for risk. Speak with your advisor to ensure that you are on the right path.

©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
AM1021341

Market Summary: October 2019

After a rocky start markets have a good October.

What happened.

Stock markets had a rough start to the month, falling sharply on several days. However, by the end of the month, all major classes of stocks were up. Bucking the recent trend, international stocks led the way. Emerging- market stocks rose by 4.22 percent and developed-market stocks by 3.59 percent (MSCI Emerging Market and EAFE indices). At home, large caps were up by 2.17 percent and small caps by 1.95 percent (S&P 500 and 600 indices). Bonds were also up: the Bloomberg Barclays Aggregate Index closed up by 0.3 percent. There was a burst of volatility early in the month, but markets quieted down afterwards. There were five days on which the S&P moved by more than +/-1 percent, and they were all in the first nine trading-days of the month.

Why it happened.

Early in the month, political events and economic news unsettled the markets. Data on manufacturing was unexpectedly poor, sending markets down. A few days later, jobs data was better than expected, sending them up again. The seemingly endless Brexit saga took a negative turn, and there were new concerns about a US/China trade deal.

But in the middle of the month, there was optimism about a trade deal and the possibility of a Brexit deal (although there’s now going to be a general election in the UK), sending stocks higher.

Central bank actions later in the month didn’t ruffle markets. The European Central Bank left interest rates unchanged. The US Federal Reserve cut interest rates by 0.25 percent but signaled that there may not be future cuts. Both moves were viewed as likely by markets, which didn’t move significantly in response.

In this month’s sidebar, we look at how markets move in response to surprises, not to what’s expected.

What this means for you.

This was a month in which all the major asset classes rose. This means your portfolio is likely to have risen too. Stocks are generally riskier investments than bonds, and they rose more this month. This means that portfolios with greater risk exposure will have tended to fare better than lower-risk portfolios. Your portfolio will have greater risk exposure the further you are from retirement or the higher your risk preference. As always, be sure to review your portfolio, or speak with your advisor, to make sure your level of risk matches your objectives.

©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
AM993094

Why Investment Risk Doesn’t Always Equal a Reward

Build your investment strategy with sound advice.

Does taking a higher risk with your investments guarantee a higher return? Most people seem to think so.

Teachers Insurance and Annuity Association (TIAA) posed that very question in a survey, and 53 percent of the respondents answered “yes.”

They’re wrong, of course. A higher risk guarantees only one thing: higher risk. (You might get higher returns from taking higher risks, but it’s far from guaranteed. Just ask anyone who’s ever bought a lottery ticket.)

If high risk can’t be relied on to produce higher returns, what can be? Well, 36 percent of the respondents in TIAA’s survey said the answer is found in how an investment performed last year.

Unfortunately, that doesn’t work either. Investments that perform best in a given year almost never perform as well in the following year. (If they did, the same investment would be best year after year. There would be only one investment, and every investor on the planet would own it.) This is why developing a sound investment strategy is such a highly complex undertaking. It’s also why so many consumers turn to professional financial planners like us to help them.

And yet nearly 30 percent of those surveyed who said they want to do a better job of managing their money didn’t include financial planning in their strategy. They said they “don’t make enough money to worry about it,” according to Allianz, which sponsored the survey.

Their view is wrong, of course: The less money you have, the more important it is to manage it effectively! (We can agree that Bill Gates can squander some of his money foolishly with no adverse impact on himself or his family. But that’s not the case for someone earning $50,000 a year.)

Fortunately, many respondents said they were open to getting help with their financial decisions. Good financial advice that’s in your best interests isn’t free, of course, but the cost should be compared to the long-term benefits the advice can provide.

AM946371

Q&A: How Do ETF and Mutual Fund Share Prices Work?

The way these instruments are priced is totally different from stocks.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I don’t know if this is true all of the time, but it seems that when I compare the share price of an ETF to the share price of a mutual fund of the same class — say, a large-cap fund — the ETF price is usually higher. Is that because of the underlying stocks that it owns?

Ric: No. Share prices for mutual funds and ETFs are actually irrelevant. For example, when a fund company brings a new fund to the marketplace, it literally invents the share price. It can be any number: $10 a share, $100 a share, $1,000 a share — that price is utterly irrelevant because all you’re doing is creating a basis, a starting point at which the trades will occur thereafter.

The company’s decision is strictly marketing: Would investors prefer to buy shares that are $10 each or $100 each? There is no difference, because buyers of $10 shares simply get 10 times as many shares as buyers of $100 shares. Don’t let the share price sway you when buying a mutual fund or ETF.

Note: This is different from stocks. Many so-called penny stocks (actually referencing any stock priced under $5) or “pink sheet” stocks (so-called because they don’t trade on any exchanges and traditionally had their prices listed on a document printed on pink paper) are highly speculative and sometimes even scams.

Aggressive brokers pitch penny stocks by claiming that your $10,000 investment can get you 200,000 shares of a stock priced at a nickel. If the price moves just a penny, your profit is $2,000! Or so the pitch goes.
In fact, the stock is unlikely to rise a penny anytime soon, if at all — because that’s a full 20% increase. Stay away from penny stocks.

AM946371

Market Summary: September 2019

Markets remain relatively calm in a news-packed September.

What happened.

There was a lot of news in September, from the announcement of an impeachment inquiry to an attack on Saudi oil facilities. But stock markets were not especially volatile, as the S&P 500 (an index of large-cap stocks) moved by more than +/- 1% on only two days. For the month, stocks rose at home and abroad. At home, the S&P 500 was up by 1.87% for the month and the S&P 600 (small caps) by 3.34%. Internationally, The MSCI EAFE Index (developed-market stocks) closed up 2.87% and the MSCI Emerging Markets Index rose by 1.91%. But as longer-term interest rates rose over September, bond prices fell: the Barclays Bloomberg Aggregate Index was down 0.53%.

Why it happened.

While lots happened in September, it is difficult to attribute overall market moves to any individual event. For example, on September 4th, the Hong Kong Chief Executive said she would withdraw a controversial extradition bill, easing tensions with mainland China; the UK parliament took steps to block a no-deal Brexit; and the New York Fed president said the Fed would continue to support the economy. In reaction, stocks were up. But later in the month, stocks fell on news that Congress was launching an impeachment inquiry. Overall, stock markets took in stride the widely anticipated cut in short-term interest rates and an attack on Saudi oil facilities.
The economic data during September was also mixed. Job creation was slower than it had been recently, and consumer spending weakened. On the other hand, industrial production rose more than expected, unemployment remains near historic lows, and inflation remains muted.

What this means for you.

At Financial Engines we build portfolios that are customized for your particular situation and preferences. This month, your account is likely to have seen modest positive returns. Yet the question remains if you are comfortable with the level of risk you have taken on. As always, we encourage you to log into your account to review your asset allocation and make sure it matches with your long-term goals. Given the conflicting news we are seeing, there may be volatility on the horizon. But as this month’s sidebar points out, market returns can vary dramatically from month to month, and year to year. If you have established an asset allocation designed to meet your long-term goals, your best course may be to simply stay invested.

©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
AM961983

Market Update, Q3 2019: Volatility, but Little Direction

The ongoing trade dispute with China and the Fed’s interest rate policy moves dominated the news in the third quarter – much as they did in the prior three months. Despite signs of slowing global growth and cooling consumer sentiment, equity markets ended near where they began. Large-cap stocks in the S&P 500 index gained 1.7% in the third quarter, after weeks of ups and downs. Stocks of smaller companies, represented by the S&P Small Cap 600 index, posted a small loss of 0.2% for the quarter.

International stock markets posted a modest loss, with the MSCI Europe, Australasia, and Far East (EAFE) index dropping 1.1% in Q3. The uncertainty unleashed by the U.S./China trade war, and the chaos surrounding Brexit took a toll on business and investor confidence globally. Despite these headwinds, international stocks are still up 12.8% for the year.

Against this backdrop of political and economic uncertainty, bonds posted another big quarter. As expected, the Fed lowered interest rates. The Bloomberg Barclays U.S. Aggregate Bond Index gained 2.3% in the third quarter, bringing its year-to-date performance to an impressive 8.5%.

The Financial Engines perspective.

The third quarter was mostly a continuation of the narrative in Q2, with economic and political uncertainty contributing to muted investor sentiment. Speculation around the timing of the next recession was a frequent topic in the press as markets reacted to a mix of information without a clear direction. Don’t fall into the trap of trying to predict the unpredictable. Maintaining a diversified and risk-appropriate portfolio is the key to weathering the inevitable gyrations of the market. Focus on the progress towards your goals. Have questions? Financial Engines advisors are here to help.

AM973206
©2019 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.

Q&A: Poor Advice on Variable Annuity?

Sometimes it’s a good idea to get a second opinion.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: Our financial advisor recommended that my husband and I transfer the money from our two IRAs into a variable annuity that has a minimum guarantee. He suggested this after I told him we were concerned about stock market volatility and the fact that our accounts haven’t done that well. I also told him we are concerned about the general state of the global economy. But when I looked online about the annuity idea, I found many warnings against it. What is your opinion? Did we receive poor advice?

Ric: Your advisor might have been trying to pacify your fears about the economy and your unhappiness with the performance of your IRA investments, saying in effect, “Here’s an alternative that moves the money into a vehicle that lets you continue to invest in the stock market, but which offers a guarantee so that if the stock market drops in value the company offering the annuity will guarantee that you don’t lose any money.”

So maybe he’s trying to placate your concerns. Or maybe he’s just twisting your concerns into a sales pitch so he can sell you a product that pays him a big commission. (When dealing with an advisor who makes a living selling products for commissions, you need to be sure about his motivations.)

Another reason this recommendation is suspect is that a primary benefit of annuities is the fact that profits are tax-deferred; you don’t pay taxes until you make a withdrawal. But your money is already tax-deferred because it’s in an IRA. That means you’re getting no tax benefit from the annuity. So why buy it?

It may interest you to know that the North American Securities Administrators Association, a group of state securities regulators, lists annuities as one of the nation’s top financial frauds. It’s not that every advisor who sells annuities is committing fraud, but enough of them are to warrant NASAA’s warning.

For all these reasons, I suggest you get a second opinion — this time from an advisor who is fee-based, objective and independent — to help you confirm that your advisor’s advice is in your best interests and not his.

AM946371

Q&A: Does Market Timing Work?

Can going in and out of the market give you better returns?

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: What’s your take on managing one’s 401(k), IRA or taxable account using stock charts — i.e., buying/selling ETFs or stocks based on trends, momentum of stocks, etc.? Perhaps one would not make as much money because of not being fully invested all the time in the market, but wouldn’t this method also keep you from losing large amounts in short periods, especially in bear markets? In other words, I am talking about technical analysis. If I have the time, wouldn’t this be a viable alternative to having a firm such as yours manage my portfolio?

Ric: No, it isn’t a viable alternative. If it were, everyone would be doing it and getting rich. Market timing doesn’t work, and charting/technical analysis, which is a form of market timing, doesn’t work either. You won’t be able to find anyone who consistently and over long periods beats the market that way. I know of no chartist who correctly called the 2008 credit crisis, for example.

The reason it doesn’t work: No system is capable of telling you when to get out and when to get back in. You have to be right every single time, because one incorrect call wipes out every previous correct call.

I’ve never seen any system that has been right most of the time, and even if one existed it wouldn’t matter — because the few times it erred would destroy the value of all the other times that it was right.

Here’s an example: A couple of years ago, a guy bragged to me that he correctly predicted the 2008 credit crisis, and he sold in 2007 when the Dow Jones Industrial Average was still near its high (at the time, around 11,000). I asked him when he got back in, and he said he never did.

So, he made one right call (got out at the high) but then made one wrong call (never bought back in). The result was that he was far worse off than if he had made no call at all: Staying in would have taken him down to a 6,700 on the Dow, but then he would have ridden it right back up again to today’s level of 27,000 — about twice as high as when he made his right call. So being right only once was very costly to him.

Avoid such folly and ignore the slick salespeople who are trying to convince you to engage in it.

AM946371

Q&A: Can You Outperform a Diversified Portfolio?

online money calculator investment receipts

Maybe, but there’s a few reasons you might not want to try.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: If, over the long run, the S&P 500 will return 9% or 10% per year, and I have a very long investment horizon (say, 10+ years), am I not better off simply placing my money in an S&P 500 index fund, which will likely outperform a diversified portfolio? Yes, I’m aware of market volatility and the risk that equities can go into prolonged slumps, but even if the investment began in 2007, the return would have been great. What am I missing?

Ric: You’re assuming that a diversified portfolio will earn less than the stock market over long periods. That’s not necessarily true. Keep in mind that a diversified portfolio is designed to reduce risk (volatility), not return.

History shows that in many 10-year periods, a diversified portfolio earns as much as the S&P, but does so with less risk. Meanwhile, many people who claim they can tolerate prolonged stock market slumps discover they really can’t. Just ask all the folks who sold in 2008 as the markets fell.

But if you are certain that you have both a long time horizon — 10 years or more — and a very strong stomach, we have no problem with your owning a pure stock portfolio.

But be forewarned: In our experience, the person who claims to have both turns out have neither.

When that market downturn comes, they realize they don’t have the strong stomach they thought they had, forcing them to sell low, with big losses. Or something comes up in life unexpectedly — a marriage, a child, a job loss or a medical issue — causing their long-term horizon to evaporate. Millions, for example, lost their jobs in 2008, forcing them to sell their investments so they could pay their bills.

They didn’t plan to sell but found themselves with no choice — again, ruining their plans to stay invested for the long term. For these reasons, people who don’t start with a diversified portfolio often later wish they had. Maybe you too.

Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.
AM946371

How to Keep Emotions Out of Investment Decisions

My strategy might surprise you.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

A caller to my weekly radio show once won the applause of the day for asking a question that might be on your mind as well:

“Ric, how have you personally learned to keep emotions out of your investment decisions?”

He found my answer surprising. Perhaps you will too.

“What makes you think I have my emotions under control?” I replied. “As a matter of fact, I’m not able to avoid emotional reactions any better than you are.”

This might seem shocking. After all, I’ve been a financial advisor for more than 30 years, and tens of thousands of people rely on me and my firm to manage their investments. So, what does it mean if I can’t manage my own emotions?

Think back to 2008, when the stock market was falling 65 percent in value. I’m sure you were scared. And so was I — how could anyone not have been frightened? But instead of selling my own investments in a panic or telling clients to do that, do you know what I did? I turned to my colleagues at Edelman Financial. We met frequently to evaluate the latest economic news and market activity, and we discovered that these group sessions created vital support for each other: When one of us was feeling shaky, others helped provide reassurance. It was almost like grief counseling.

And this was vital — because our nervousness maximized when we each started thinking about our own personal accounts. But when we focused instead on the firm’s asset base, our emotions were removed. As a firefighter once told me, “When I arrive at the scene, people are always in a panic. But I never am. After all, it’s their crisis — not mine. And becoming panicked like them doesn’t do anyone any good. So, I just go about my job, and we get through the crisis as quickly as we can, minimizing the damage.”

A similar thing happens when a loved one dies. Everyone is sad, but not everyone collapses in sobs at the same time. One moment finds you hugging a loved one; then later someone is hugging you, offering welcome and needed assurances that you’ll get through it. That’s how I and my colleagues at EFS got each other — and our clients — through the emotional stress of 2008: We relied upon each other.

And we had much more than mere emotional support to help us. We didn’t get through the crisis by singing Kumbaya, hugging each other and saying, “there, there.” Instead we gave each other an as-needed Cher-slapping-Nicolas-Cage admonition to “SNAP OUT OF IT!” along with a reminder that our disciplined investment management approach would help enable us and our clients to weather the storm. Indeed, our extensive diversification and strategic rebalancing while maintaining a long-term perspective were precisely what helped us maintain focus, and they were precisely what we were doing.

Yes, my calm colleagues were able to reassure me that our investment management program — which I’d designed, by the way — was going to help get us through the crisis. So I told myself to relax and get back to the business of reassuring our clients.

I’m not smart enough to beat my emotions. Instead, I’m smart enough to know that I can’t beat them. So I enlist support from others. And that’s what we encourage our clients to do: When you’re nervous, don’t sell in a panic like many others do. Instead, call us. We’ll help you get through it.

The message is clear: Rely on an advisor. But you must make sure that your advisor has two vital attributes: a disciplined investment approach and the experience to know how important it is to stick with it during difficult times.

If your advisor had no disciplined investment approach — if all he or she has done is sold you a bunch of investments that you were willing to buy — and if he or she didn’t go through the crash of 1987, the panic of 1994, the tech bubble of 2001 or the terror attack of 9/11 — then he or she may panic as much as you. And as our firefighter friend taught us, having two panicking people doesn’t lead to good outcomes.

Many people went through 2008 either without an advisor or with one who left them no better off than if they had been alone. In their panic they sold their investments, often at huge losses. These people are clearly acting as their own advisor. But as the adage says, a doctor who treats himself has a fool for a patient.

So are you when dealing with your own money. That’s why we’re all better off talking with an experienced advisor — one who can be objective when we’re not.

AM946371