IS A BIG CORRECTION WAKE-UP CALL NEAR?
Monday, March 16, 2020
Posted by: J.R. Hollon
IS A BIG CORRECTION WAKE-UP CALL NEAR?
“ARE YOU PREPARED?”
By: J. R. (Jim) Hollon
Why will the next big market correction bring us a major wake-up call? Are you prepared?
Preparing you for the next wake-up call, ask the question, how can you compare your internal doctor and your cardiologist treatment to the 1990 Nobel Prize for Economics. The doctors give you a gallon zip lock bag full of different medications. Ask you to bring them to each visit, and keep you alive, after five bypasses, for another 30 years. Now for comparison, the Nobel Prize gave us the reason to own all the different asset classes of equities, along with the “Efficient Market Frontier” where you can compare the risk you are taking with the return you are getting.
To bring us up to date, stating March 9, 2009 the market, the Dow Jones Industrial Average closed at 6547, ending the correction downturn. Now, on February 21, 2020, the Dow closed at 28,992 a difference of approximately 22,445 which amounts to approximately 342% increase. So, there has been no major correction in this 11-year history of the market.
Why should you be concerned about a huge wake-up call? Can you say you have studied the cost that comes out of your ETF and Mutual Funds annually each year before you can have any return at all? That cost is made up of management cost, gross expense ratio, probably 12b1 fee, and your advisor’s fee, just to name the obvious ones. Other cost is there, but not as obvious, such as turnover of portfolio cost, and trading cost, etc. Please read the article “How “Independent Brokers Make Money” recently published in Barron’s publication by Daren Fonda, then let it blow your mind as to what other cost do they get from me? When you do not know your cost, you have to wonder which class ETF or Mutual Fund did they sell me. May I give you an example to wake you up? Go to Morningstar, print out all the classes (I went to the A’s) and found American Funds Global Growth Port A through R6 and found 14 of them. Then I studied the 5-year returns and the low one was 5.60%* and the best one was 7.29%*. What caused this wide range of returns? You guested it, cost. So, you think you know you are prepared for a huge wake-up call. Can you say which class you own in all of the asset classes of equities in your ETF’s and Mutual Funds portfolio? This reminds me of the article I wrote, ”You Can’t Do This By Yourself”. You need someone to analyze the portfolio for you. Another example, if I may, on a recent analysis of a potential client who held 3 million of assets in 18 ETF’s and Mutual Funds. The difference in his 18 funds, three-year return, was 1.47% less than he could have owned in a low-cost asset allocation plan with a much less cost structure than his ETF’s and Mutual Funds. Compound his 3 million another 1.47% for the next 30 years, he is expected to live, and you will see how much more the allocation using the 1990 Nobel Prize for Economics could do for him. Definitely he is not prepared for the wake-up call because if you are truly diversified, you can usually go up with the rapid growth as the market rises very fast to get back to where it corrected. So, compounding approximately 3 million over 30 years at 1.47% would provide this person with approximately $1,647,836 extra money. Now we can see that a little extra return over a few years can make a huge difference.
Behavioral research done by “Dalbar 2019 QAIB Report” for the period ending December 31, 2018 shows the S & P 500 lost 4.38% for the year while the average equity investor lost a staggering 9.42% in 2018. Some investor behavior, page 14 of the same report, shows the following behavior: loss aversion, narrow framing, mental accounting, diversification, anchoring, herding, regret, media response and optimism is what causes major problems for the average investor. A chart published in USA Today showed where 41% of people will not change their investment for any reason while a banker offering a toaster would cause people to move. Our behavior becomes a major problem for us.
Do you really want to know if you are prepared for a huge wake-up call? May I help you determine if you are? Ask yourself, and you are currently trusting someone else to choose investments for you, so now you have to be honest with yourself and answer some questions which will tell you how prepared you are for the next big wake-up call. Has your portfolio kept your return close to the Dow return for the last 11 years, since March 9, 2009? Do you even know the answer to that question? Are you someone who moves in and out of the market? Do you know what risk you are taking for the return you are getting? Do you know all of the different asset classes or Mutual Fund or ETF fund? Do you know how many equities there might be in a truly diversified portfolio? Do you know how to determine what risk factor (standard deviation) you have in your portfolio and how it relates to a portfolio, like fixed income, balanced or moderate, long-term or aggressive? Do you know what percentage fixed income and equities would tell you what risk portfolio you are in? We can go on with this because there are 15 plus things in your portfolio that have an effect on the return you receive.
When you think about investing outside of your company retirement plans, ask the question if I have limited assets available, what is available to truly diversify those assets? Let’s face it, even in a 401k or 403b retirement plan there are not enough asset classes holding enough equities for you to truly diversify your account. Now, look at the choices and see if you can determine the objective of the fund or what asset class it is? In a target 401k plan, ask yourself why would you want to stop taking risk or drastically reduce it when you are expected to live another 30 to 35 years after retirement age. Do you know that there are 2 asset allocation programs that are following the 1990 Nobel Prize for Economics, where your small account would have the same diversification as one with millions has? Do you know that one of them has a much lower cost than the other? Do you know you have to have an advisor to help you invest in either of those asset allocation plans?
I could keep going with helping you determine if you are truly diversified and ready for the next huge wake up call. Those of you that are, please join me and become like myself just waiting to be fully invested and truly diversified when the market correction is over and the fast rise of the market to get back where is started the correction, I know that is where I make my money!
May I help you become prepared for any market wake-up call? May I analyze your portfolio at no charge?
*Returns shown on Morningstar data sheet.
James R. (Jim) Hollon 205-919-8661
Shirley Hollon 205-492-7916