Do you ever wonder why it seems so difficult to get ahead financially? I do not think most people understand the fleeting nature of money - the notion that we are lured into financial decisions intended for gain that instead, end up hurting ourselves.
Here are a couple of truisms at the root of the issue. First, is that it takes a lifetime of correct choices to build wealth, but only one bad choice to destroy wealth. Consider an investor that invested in the greatest tech companies from 1980-2002 and as each year passed, that investor took all profit and invested again in the latest and greatest tech offering. Many great decisions were ultimately met with the decision to stay invested in 2000-01 (while prices skyrocketed to 100x the real value of many tech stocks). In 2001-02, more than 2/3 of the wealth accumulated from 22 years was lost simply because of the decision to roll the dice one more time. The resolution to this truism is to not assume that things that worked last year will always work again next year. When change occurs, it usually hurts most for people clinging tightly to what worked best before the change happened.
The Fleeting Nature of Money
It takes a lifetime of good choices to build wealth; it only takes one bad choice to destroy wealth...
The issue here is that most people do not understand the true nature of a good investment opportunity. Consider that in the past 4 years, investors have dropped over $1.7T into bond funds (mostly seeking steady returns and some interest payments while safe money at the banks is paying near zero interest).
The problem is that people are looking at track records and historical returns from bonds that cannot be repeated as they wildly throw money into this overbought asset class.
High quality bonds have historically been a very important part of sound investment strategies, but most people do not want to buy them when they are reasonably priced and paying attractive yields. When interest rates fall, bonds go up in value. It is only in the last few years when interest rates have dropped to near zero that average investors are finally motivated to buy bonds. What happens when rates rise?
It makes me imagine someone trying to drive down the road staring at the rear view mirror trying to figure out which way the road turns in front of them. They can see the gains bond investors made in the rear view mirror. They just can’t see the cliff they are heading for in front of them.
A second truism about the fleeting nature of money is that most people only become interested in doing the right thing with their money after the time has passed to do it.
Spring / Summer 2014
Lyn Adams Jr.
The Big Pie
The USA’s $15.8 trillion is 22% of the world’s $72 trillion economy. Europe represents 10% of the global economy and China is now half the size of the USA at 11% and growing).
The max Social Security retirement benefit available at full retirement age is now $2,553 per month in 2013.
Source: Social Security Administration
What Are Bull Markets Made Of?
It is an interesting question and one worth exploring: what are bull markets made of? We can define the term by a percentage move in the market, but what is it about an economy, global situation or investor attitude that drives that performance? Investors tend to think that bull markets are the days of wine and roses, with stability and profitability for all. In reality, bull markets climb a wall of worry and by the time things begin to look good, stock prices are already higher.
Bull markets are times when things are getting better. Usually, bull markets begin when things are pretty bad, as the economy improves or risks are falling and the stock market rises. That seems logical, but one of the things common to the early stages of bull markets is that investors are skeptical or distrustful of the increase in stock prices; they are waiting for “the other shoe to drop.”
The Wall Street Sentiment Indicator is a survey that was crafted in 1986 and it measures the average exposure to stocks that Wall Street strategists are recommending to their clients. Right now that number is 43%. Compared to a traditional allocation of 60-65%, this seems low. In fact, this is the lowest reading in the history of the survey.
Investors and strategists alike are wary of equity markets; everyone seems to be waiting for the next leg down. That’s what bull markets are made of. When everyone gets excited about the stock market again, prices will be higher, stocks will be expensive and the next real bear market will be right around the corner. As long as fear and concern are more common than greed and euphoria, it is unlikely that we are near a market top.
Imagine that the other shoe doesn’t drop. Imagine that slow plodding economic growth continues and perhaps picks up a bit and that Europe doesn’t fall apart but starts to slowly improve. In that scenario, can the market keep moving higher? Can the optimists be right again? The simple answer is “yes.”
As bad as the markets of 2008 and 2009 were, the S&P 500 has risen over 100% from the low. It is possible that we are looking right at the next bull market, a market that has more than doubled in just over 3 years and we still don’t believe it? I’m still in the camp that’s a bit wary but I continue to doubt that we are on the brink of the next big move down.
Financial Advisor, CFP® Partner
In And About The Office
Spring / Summer 2013
AFP welcomes Brett Campbell as a Partner
Effective January 2013, Brett officially became an equity partner at Adams Financial Partners, Inc. We are grateful for his many years of dedicated service and tremendous experience that he brings to the ownership team. Brett, his wife Lindsay, and his three children Blair, Brody, and Barrett are a wonderful part of the AFP family. We hope that all of our clients get to meet and interact with Brett in the future.
Name Change, But Business As Usual
Also in January 2013, Financial Network Investment Corporation changed their name to Cetera Advisor Networks, LLC. This is the Registered Broker/Dealer and Registered Investment Advisor that many of our advisors are registered with in order to execute trades, or solicit investments. We view their name change as essentially a marketing change as Cetera has owned FNIC for several years as well as other B/Ds. By renaming all of these as something associated with the name Cetera, it helps with visibility in the B/D community. We don’t see this as having any effect on our work here at Adams Financial.
In The Market
Since the time of our last newsletter, the headline events of the U.S. election and fiscal cliff have come and gone and the S&P 500 has set a fresh five-year high. Returns for the S&P 500 finished 2012 with a gain of 16% including dividends, and through January of 2013, the index has returned just north of 5%.
Domestic economic data shows an economy that is growing, albeit slowly, as we have seen positive employment numbers, strengthening consumer confidence, and the ISM manufacturing index expanding in January.
Fears from Europe have started to subside but the continents problems are far from over. Progress is being made but it will be a long, slow recovery and volatility should be expected.
Recently, interest rates have started to move higher, with the 10-year treasury yielding 1.98%. Finding yield in the bond market continues to be difficult but the potential for rising rates is increasing. We feel that this is a significant risk that is not accounted for by most investors.
The fiscal cliff discussion will start again in the coming weeks so the political bantering could lead to an increase in volatility. We will continue to keep you up-to-date with our views and please do not hesitate to call your advisor if you have any questions.
Do You A Time Bomb?
There is much talk these days about life insurance policies at risk to lapse? When it comes to having a sound financial plan, there are few items more important than ensuring that your loved ones will be in good financial shape should you unexpectedly pass away. However, the topic is often avoided because it elicits undesirable emotions. We don’t like to think about the death of a loved one and nobody wants to spend an evening with an insurance agent discussing life insurance. Because of these components, most people never review their life insurance policy, but it should not be something you buy and forget about. Here is one example of why you should have your policies reviewed:
We have reviewed several polices lately that were destined to lapse and the client had no idea, and even worse, did not know it was possible for them to lapse.
Many variable rate policies were sold in the 80’s and 90’s when interest rates on cash values were higher. These polices were designed with the assumption that those interest rates would continue. They have not. As a result, the cash value did not grow to cover the increasing cost of insurance as the insured gets older. Eventually, there is not enough cash value in the policy to pay for the cost of insurance and these policies will lapse, even though you have never missed a premium payment.
Bottom Line: Whatever type of insurance you have (Whole Life, Universal Life, Term, etc.), I suggest you have a periodic review of policies with your financial advisor.
At the very least, you should revisit your policies whenever there is a significant life event, such as the birth of a child or the purchase of a new home. We view life insurance as one of many tools available to achieve your financial goals. While it is not our primary focus, our advisors are licensed in North Carolina (and several other states).
REQUIRED DISCLOSURES: Past performance is no guarantee of future results. Investments in securities are not FDIC insured, and may lose value. Please consult a current prospectus prior to investing in mutual fund shares. All information contained herein gathered from sources deemed to be reliable. For more complete information, please see your official statement. The views are those of Adams Financial and should not be construed as investment advice. All economic and performance data is historical and not indicative of future results. Investors cannot invest directly in an index.