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2017 Third Quarter Market Recap

2017 Third Quarter Market Recap


Steady As She Goes: The Market Grinds Higher During The Third Quarter With Volatility Nowhere To Be Found

Equity markets continued their steady ascent during the third quarter, as the S&P 500 registered a 4.5% gain. Once again little volatility could be seen. The largest (peak to trough) decline came in under 3%, matching the smallest first 9-month decline in history. As discussed last quarter the absence of market corrections historically has generated positive returns, but also elevates the potential for choppiness during the final quarter of the year. We agree with this assessment. There are many fundamental reasons for strong market returns – accelerating corporate profits, confident US consumers, and coordinated global economic growth. As such, we remain constructive on global equities especially relative to bonds. But, it is not a stretch to question overall investor complacency given elevated valuations, an uncertain political environment (tweets abound, failed healthcare reform, uncertain tax policies) and a tense worldwide geopolitical situation (North Korea, etc.).

The US Economy Is Healthy Despite A Rain Soaked September Jobs Report

The US economy is still a workhorse, despite being in the midst of an expansion spanning 99 months and counting. This marks the third-longest expansion in history and one that could be poised to become the longest. A recent quibble we’ve heard lies within the September jobs report, which saw a loss of 33,000 jobs. This was the first monthly decline in jobs since September 2010, during the early innings of the post-crisis recovery. However, we’d be very careful reading too much into this data point for two reasons. First, hurricanes Harvey and Irma caused major disruptions. Restaurants alone accounted for 105,000 lost jobs as many locations closed. Secondly, the unemployment rate fell to 4.2% which marks the lowest level since the dot-com days around the turn of the century. We’ll withhold judgment on jobs data for a few months to let the effects of the storms wash out.

We’d like to spend a moment discussing International economic growth. US investors can be hyper-focused on the domestic economy, giving little thought to the global picture. We’d advise against this. Global growth is building and expanding at levels not seen in years. For example, the global manufacturing PMI (a broad indicator of economic health) recently hit 53.2, or its highest level since May 2011 and above the US level. Not only is global PMI data at a 6-year high but all 17 major developed and emerging countries are expanding (above 50). This is at a time when international equities broadly trade at lower valuations with higher yields than their US counterparts. We’re not saying there aren’t risks, but we believe more attention to international economies and equities is warranted.

A Calm Year Has Been Welcome, But We Would Prepare For A Bumpier Ride (Just In Case)

Following the turbulence during the second half of 2015 and early 2016, we have been just as pleased as anyone to see 2017’s calm progress. We’re even more pleased by the fact it has been driven mostly by fundamentals and not investor excess. Corporate profits have exited a three-year stall, oil has stabilized at a palatable level and credit spreads have tightened helping companies better manage debt and capital expenditures. Despite these positive developments, we do not expect volatility to stay at record low levels into perpetuity. Trying to time exactly when volatility returns to markets is next to impossible.  But, with valuations on the higher end of historical ranges, political uncertainty at elevated levels and threats of war pinging around the ether, we think prudence lies in preparation for higher levels of volatility.

We want to be clear, preparing for more volatility does not mean that we think the world is about to end.  We at CIA continue to have a favorable view of global equities, especially compared to a stretched bond market held together primarily by global central banks and low interest rates. We only are using these paragraphs to highlight our belief that record levels of complacency are highly unlikely to continue. We are keenly aware of this and feel the best defense for our worldview is a well-constructed diversified portfolio of stocks and bonds that can withstand any investing climate.

As always, please reach out with any comments or questions you may have.


The Investment Committee



Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


A Former FBI Agent’s Advice On Protecting Yourself From Cyberfraud

In this day and age, we all have to take cyber security very seriously. And with good reason: Equifax, Yahoo!, Target, and the list continues to grow of major company data breaches.

Given the opportunity, the seemingly never-ending parade of techno criminals would take you to the proverbial cleaners. These hackers employ new and nefarious techniques to steal your identity, drain your accounts and open new ones in your name, wrecking your credit. But you aren’t helpless in the endeavor to keep your online accounts locked down. A few simple strategies will make you (and your financial well-being) safer.

Don’t take it from me. Take it from a former FBI agent.

The one-time G-man heads up one of the nation’s largest investment firm’s corporate investigations and its fraud-protection program.

On this agent’s dossier is a decade and a half of white-collar crime fighting: financial fraud, corruption and garden variety cybercrime. He was chief of the FBI’s Undercover and Sensitive Operations Unit in Washington, D.C., heading up many of the bureau’s most complex cases. In the second half of his career, he’s a top-tier professional in cybersecurity and risk mitigation.

Today, his life’s work is keeping people and their money safe from virtual thieves. During our conversation, he told an illustrative story, and I want to share it with you. It’s about two guys who want to make you a target. Meet Yuri and Dimitri.

Yuri is a Lithuanian criminal mastermind. He employs Dimitri, a skilled hacker residing in the U.S. One thing to note here is that this is not a small business outfit. Yuri works with dozens of sophisticated cybercriminals just like Dimitri. What do these hackers do for Yuri? They search for and target high net-worth individuals.

In their pursuit, they compile detailed profiles, getting to know you, your spouse, your kids, your schools, churches, alma maters, hobbies. The list goes on. Armed with this information, they plant an unsuspecting piece of malware on your computer. How? By sending an email that looks like it’s from somewhere like your church.

Embedded is a link, and once you click, you have just unknowingly given the malware access to scan your device. The next time you type in your user name and password at your financial institution’s site, the malware records it. Yuri and company then use this information to open an online account in your name, to link it to your current accounts, and, one day, to draft your funds out. Just like that.

This is just one iteration of the cybercrime racket called “True Name Fraud.” Here’s how our expert recommends you protect yourself:

1. Freeze your credit: Our man suggests you do this with all three major credit bureaus. Remember, never (and I mean never) lose your PIN. It is your access card for freezing and thawing your credit report accounts.

How does this help? When opening up a new “mirrored account” online, most firms will verify or check your credit before they do so. If your credit reports are frozen, not only have you disallowed a criminal from borrowing money in your name, but you’ve also prevented that criminal from opening a new account in your name. No new account means no anonymous, “same named” account to siphon money to and from.

2. Two-factor authentication: Add a layer of protection by selecting this option for anytime you log into your account on your financial institution’s website. Just do it. Since its inception in 2012, nearly all major web services now provide some form of two-factor authentication.

3. Monitor accounts regularly: Make it a habit to look at transactions on all of your accounts on your own, and do it often. Additionally, you can consider using a monitoring service like LifeLock or Credit Karma.

4. Practice prudent cyber hygiene: Don’t just click on any old link. Keep an eye out for erroneous links and emailed links that look fishy (or phishy).

This one is difficult to practice perfectly, so our expert recommends having a separate computer/laptop/tablet for financial accounts only. This means that on this separate device, you don’t even link the email, and you never, ever go to websites outside of the ones belonging to your financial institutions. By eliminating your surfing on your “financials-only” device, you force yourself to have good cyber hygiene while helping to prevent hackers from putting malware on your device. No malware equals no inroad to stealing your passwords and accessing your financial institutions.

5. Consolidate: There’s no reason to have two dozen bank and investment accounts. If you have a slew of accounts, trim them down to two or three institutions. This makes monitoring your transaction activity less complicated.

6. Use live people: Low tech is the new tech. Try doing business with actual humans. You should talk to (and not email) your financial institutions when it comes to moving funds or doing anything new or material in your financial life.

Technology has made our lives easier and more convenient, but with this ease and convenience comes a lessening of privacy and rise in the opportunity for cybercriminals to steal our money. While no list of steps for protective measures and good habits can ensure that you won’t become a target, it is a fact of human nature that hackers pick the low-hanging fruit. For these criminals, time is money, so employing these steps gives you a much higher probability of security. Because most people don’t employ all of these measures, there are millions of easier targets on which cybercriminals can set their mark. Don’t be one of them.


The original AJC article appears here.


This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


Lessons from ‘The Lost Decade of Stocks’

As the stock market continues to reach new highs, with the Dow soaring well above 20,000, I’ve found myself reflective of other times in recent investment history. Over the years, the high and low tides — and sometimes crashing waves — of our always changing economy have taught me certain financial truths. Let me share what I learned from 1998 to 2009, a period I refer to as “The Lost Decade of Stocks.”

I moved to Atlanta just after the 1996 Olympics, a recent graduate of the University of North Carolina at Chapel Hill. In the summer of 1998, I took my first full-time position in the investment business. If you recall, Wall Street firms were enjoying a tremendous bull market run in those days.

For context, from 1981 through 1998, the Dow skyrocketed from about 1,000 to 9,000. Of course, there were blips along the way, but it averaged about 17.5 percent over the 18-year span. Homing in on the decade of the 1990s, the market was up 18.2 percent per annum. The only down years happened in 1981 (minus 4.9 percent) and 1990 when the Dow was down 3.2 percent. It was a bull market to beat all bull markets.

The year I entered the investment business, however, the landscape was about to undergo dramatic change. Let’s review some of the details of The Lost Decade of Stocks:

  • In the summer of 1998, the Dow was trading at 9,000.
  • Fast-forward five years, and the Dow was actually lower at 8,500, reminding us that markets can actually sink.
  • By the end of the 10th year, the Dow remained lower, at 8,600 in 2008.
  • It wasn’t until the 11th year, July 2009 to be precise, that markets began reaching new and sustainable highs, with the Dow getting back to its previous level of 9,000.
  • As a decade, the 2000s were awful for investors: The market saw peak-to-trough drops of 49 percent and 57 percent in the years of 2000-2002 and 2007-2009, respectively. Six years were up, while four were down. In 2008, the market dropped an incredible 37 percent.

What did I learn during this period of time as an investor, and how did I weather the ebbs and flows? Sometimes there are simple answers to complex problems. I experienced the real power of optimism, patience and income.

I’ve always been optimistic about the prospects for our country and the U.S. economy. I suppose it’s just part of my nature and outlook. Often, people will ask me, “What’s the market going to do in the next few years?”

My answer? No one knows. While I have utmost confidence that our economy will continue to grow, we should always be prepared for another Lost Decade of Stocks. Plan for very modest returns, and if the ensuing economic growth matches or exceeds that of our longer term economic history, then you will create a tremendous cushion.

Perseverance through patience

Even when the market seemed to be in a free fall, I never lost faith in the power of the U.S. economic machine. Nor did I lose belief that businesses and corporate earnings would continue to grow. The Lost Decade of Stocks did, however, test my patience. Oh, did it test my patience.

What I found is that despite the weariness that may come to investors in times of economic strife, we must wait out the storm. The more patiently we wait, the vast majority of the time, the better off we are as investors.

The power of income

Turning away from emotion and toward the nuts and bolts of investing, I cannot stress enough that dividends matter. Remember, the Dow made no forward progress for 11 years — beginning at 9,000 in 1998 and roller-coastering all the way back to 9,000 by 2009. Flat. But with dividends reinvested, an investor’s total return would have been about 31 percent, or 2.5 percent per annum. Herein lies the power of dividends and income.

Of course, stocks aren’t the only asset class that pay income. There are also bonds, REITs, preferred stocks, and others that pay various levels and forms of income. But for today’s discussion, I want to focus only on stocks.

Dissecting dividends and returns, we see the income served a dual purpose of paying investors while they waited and created a decent positive return. This happened even in a long and turbulent period for stocks. To this day, I own a portfolio in which almost every investment pays something.

Income-paying viability

Your question now may be just how we determine the income-paying viability of a dividend-paying stock. First things first — the state of the economy. From what I see, we still have room to run in the current economic expansion, which allows company earnings to continue on their expansion path.

And what about on a company-to-company level? Consider these two crucial points. First, the dividend payout ratios can’t be excessive. It’s a bad sign if a company is paying out 90 percent of its earnings to meet their dividend; the income is likely soon to be cut.

Second, as long as a company has a solid record of free cash flow (a more stringent way to look at a company’s headline earnings), you’re likely in good hands. The free cash flow equation helps determine what companies are really left with at the end of any given period of time. It’s simply a company’s operating earnings minus its capital expenditures.

In the end, you want to buy companies that are growing earnings in a sustainable way as they expand. If you can find companies like this, you’ve got a great shot at continued dividend payments, or even better, increased dividends.

As we end this stroll down memory lane, I am reminded of an ancient quote from Confucius: “Study the past, if you would divine the future.” Of course, all investors know that there is no such thing as divining the next move of the stock market, but there is much wisdom here. Armed with information on how past years evolved and resolved, and learning from lessons from my personal experience, perhaps you will make practical decisions if faced with another Lost Decade of Stocks. Let’s hope we won’t have to anytime soon, but if we do, we’ll be prepared.


The original AJC article appears here.


This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.


Advice to Parents and Grandparents: Be Careful About How Much You Put In Your 529 Plan

Are you saving too much for your children’s college education? Really. This is an important financial planning question. If it makes you arch an eyebrow, it’s because this side of the issue isn’t part of most higher education conversations. But it should be.

At first blush this notion seems to cut against news about the soaring cost of tuition at our nation’s universities. And it is true that college is getting more and more expensive. According to The College Board, between 2011-2012 and 2016-2017, tuition and fees “rose by 9% in public four-year universities… and 13% at private nonprofit four-year institutions, after adjusting for inflation.”

So, it makes sense that today’s parents have a natural inclination to contribute more to their kids’ 529 College Savings Plans, not less. Take a friend of mine, for example. He is absolutely convinced that his two-year-old daughter is bound for Harvard. Every month, he contributes a substantial $1300 to her 529 Plan. Is this the most practical path towards saving for college?

My answer is no. Setting aside serious money like this for higher education can, over the long haul, lead to paltrier retirement nest eggs and heftier penalties for any leftover 529 funds. More on this later.

Our first order of business as parents should be insuring we have enough money saved for our retirement. This isn’t selfishness – it’s practicality and prudence.

Consider two facts. First, banks will lend money for children to go to college, but they won’t lend money to fund retirement. And second, sending our children to even the best schools may seem like a gift, but this gift quickly becomes burdensome if we have to turn to them for financial support during our retirement years.

What’s a parent/one-day-retiree to do? Your first order of business is to consider living by the TSL Rule. The abbreviation TSL stands for “Taxes, Savings, Life.” This rule simply states that you should earmark your income in the following way: 30% for taxes; 20% for retirement savings; and 50% for life expenses. Notice that the 20% allocated for savings is specifically for retirement, not all savings endeavors. Any money you contribute into a 529 Plan should come from the life expenses category. Meaning, you don’t short change your retirement share.

From there, it’s worth understanding that when it comes to saving for our children’s college expenses, folks fall somewhere on a spectrum. At one extreme, we have the 100% funding of any institution, public or private. On the other end are parents who don’t want to contribute at all, because they paid for their own college education and believe it builds character. Most of us exist somewhere in the middle.

I’ve set my goal at saving 60% of what a public university is estimated to cost when my eldest child reaches college age. For my younger child, I am saving 40% of the price. Why? Because life happens, and my children could approach their secondary education in a variety of ways.

Perhaps one or both of my children receive scholarships. Perhaps one or both join the military and get the G.I. Bill. And perhaps one or both decides not to go to college at all. If both do decide to go to college, the 60%/40% split is designed to allow a trickle down of leftover funds from my older child’s education to my younger child’s tuition bill.

If I come up short, I can always borrow money, dip into other savings, or even use cash flow, because by the time their college-bound my salary will likely have increased.

The bottom line is that I don’t want a big surplus in my 529 when my kids receive their degrees. Any leftover money in that account that is withdrawn for a non-educational use is subject to sizable consequences. You will pay both ordinary income tax on the gain plus an additional 10% penalty on the gain. Ouch.

People talk about the cost of college tuitions breaking the bank. It doesn’t have to. And perhaps most importantly, we don’t have to break stride in our retirement planning to help fund our children’s education. Done smartly, we can invest in both. 


Wes Moss Named Top 100 Independent Financial Advisor by Barron’s Magazine

Capital Investment Advisors is proud to announce that Chief Investment Strategist, Wes Moss, has been named one of the nation’s Top 100 Independent Financial Advisors by Barron’s Magainze. This ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms, and the quality of the advisors’ practices. The full list is available here

Wes is the host of Money Matters – Atlanta’s longest running live call-in, investment and personal finance radio show – on News 95-5FM and AM 750 WSB. He’s also the Chief Investment Strategist and a partner at Capital Investment Advisors (CIA). In this role, Wes is responsible for communicating CIA’s position on markets and investments. CIA currently manages more than a billion dollars in client assets. In 2012, he was named as one of the top 40 fee-only investment advisors (under 40) in the country by Wealth Management Magazine. In 2014 and 2015, Barron’s Magazine named him as one of America’s top 1,200 Financial Advisors. Wes was also named one of Atlanta’s 40 Under 40 by the Atlanta Business Chronicle in 2015.


How To Protect Yourself After The Equifax Data Breach

By now you’ve heard of the epic Equifax data breach. It’s a scary time to be a consumer – the breach has impacted over 143 million Americans. But we aren’t helpless. In the wake of this possibly calamitous occurrence, there are some steps we can take to fortify our personal and financial data security.

Read on for suggestions on how best to weather this storm, and to reinforce protections to your personal information.


The first step consumers can take to protect their data is to initiate a credit freeze. A credit freeze is a way to seal your credit reports.

Once you institute a credit freeze, you are provided with a personal identification number (PIN) that only you know. When you have a credit freeze active on all of your credit reporting accounts with the big agencies (Equifax, Transunion and Experian), the bureaus are not supposed to release information on your credit report to any new company. The freeze has no impact on your current credit lines.

This means that if a criminal submits an application for new credit or loan in your name, the credit freeze prevents access to your credit report. Thus, any new account request or inquiry will be rejected.

Here you have one surefire way to add a layer to your identity protection strategy. In the event that you want to apply for new credit, you must first “thaw” your credit freeze. Short of changing your social security number and date of birth, this step is probably your best protection against identity theft.

One crucial point to note here: never, I repeat, NEVER lose or misplace your PIN. So long as you have access to your PIN numbers, you can freeze and thaw your credit reports very quickly.

For a detailed, step-by-step guide on how to freeze your credit accounts, go to Clark Howard’s article on the topic.


The next defensive step we can take against identity theft and credit card fraud is to work with a company that specializes in identity theft protection. For this piece of my personal and financial data security, I use LifeLock.

Through the LifeLock identity theft protection system, a heightened level of vigilance and understanding of your particular account transactions is applied to your credit reports. Any activity that appears fraudulent, like applications for various credit and non-credit related services, is detected. You then receive a phone, email and text alert of the suspicious activity. LifeLock keeps constant tabs on your credit reports so you don’t have to.

LifeLock offers several options when it comes to layers of protection. But, for around $10 per month, the company provides identity theft monitoring and a handful of other benefits. Some of LifeLock’s added perks include:

  • Stolen Funds Replacement (meaning if you lose funds due to identity theft and LifeLock restoration services is unable to recover the funds, insurance provides coverage for your losses up to your plan limits);
  • Personal Out-of-Pocket Expenses (meaning if you incur expenses such as document fees, lost wages and travel costs relating to identity theft, the insurance provides coverage for your losses up to your plan limits); and, most, notably,
  • The $1 Million Dollar Service Guarantee (meaning in particularly complex cases, if LifeLock’s efforts require outside legal counsel and subject matter experts to assist you in the restoration of your identity, LifeLock will obtain the necessary services on your behalf).

One thing I appreciate about LifeLock are the alerts I receive if it appears anything out of the ordinary is happening with my financial transaction behavior. These alerts force me to go into the system and review transactions. In fact, they are so good at what they do, it borders on annoying because I receive so many alerts during a week’s time.

Another option that I use, and one that is free of charge, is Credit Karma. With Credit Karma, you have access to your credit scores and reports from TransUnion and Equifax, along with weekly updates. If an important change happens on your TransUnion account, Credit Karma will send you a credit alert, which can help you spot identity theft.


Whether or not you use LifeLock, Credit Karma or a similar service, you should always check your online accounts several times per week. It pays to keep track of your financial activity on a regular basis. This level of financial caution is required in today’s world of cyber finance and cyber-crime.

One note – I believe consolidating your investments and banking into as few places as possible is an important security strategy. Think about it. If you have three or four banks and two or three brokerage firms that you work with, it can be a tall order to diligently monitor so many different accounts. Of course, I’m not saying you want only one account, but try to choose fewer, better institutions and limit your total number of accounts as much as possible.


After any data breach, and especially after one with the magnitude of the Equifax breach, we as consumers must remain vigilant. This includes being leery of telephone calls from unknown numbers and avoiding falling victim to email scams. Remember, never provide personal information to anyone who calls or emails you. Err on the side of caution, remain vigilant, and consider the protective steps above, and you should weather this storm just fine.

Read the original article here.


Don’t Take It With You

Retirement is traditionally viewed as the ultimate “me-time,” a well-earned opportunity to step away from a lifetime of work and finally devote serious time to passions new and old. Travel, golf, fishing, reading, gardening, visits with the grandkids. The list of pleasures is endless and intoxicating.

But, as with any life phase, it’s important to maintain a balance. Just as you didn’t want to become consumed by career at the expense of your family, in retirement you don’t want to become disengaged from the wider world. It’s not healthy, for you – or the community.

Every year, roughly 350,000 Baby Boomers head into retirement, taking with them not just a gold watch, but a lifetime’s worth of experience, wisdom, skill and financial resources. More than 60% of retiree households have a net worth in the six-figure range. Ten percent have seven figures of wealth. Those savings were amassed over successful careers as teachers, managers, entrepreneurs and craftsmen.

This collective wealth and experience is awe inspiring. Think of the social problems – local and national – that could be solved, and the challenges overcome if we could harness more of this tremendous resource.

In my work as a Financial Advisor, I’m meeting an increasing number of people who, for various reasons, are uncomfortable leaving all their money to their heirs. One option, of course, is to make a large bequest to a favorite charity in your will. But here’s another idea – one that can turbo-charge your giving. Consider putting your talent where your money goes. Make a significant annual contribution to a charity or non-profit while you actually work with that group to further its mission. This work could be as a volunteer, advisor or board member.

Trust me. Your money will be greatly appreciated, but your elbow-grease will be treasured. Think about it. Yes, it’s a challenge to raise $1,000 for an afternoon tutoring program. But it’s probably a lot harder to find someone with the time, talent and passion to actually tutor a child at 3pm every Wednesday. And what non-profit couldn’t benefit from the accounting, management, IT or other skills you honed over a lifetime?

Of course, your time and talent will be equally welcome even if you don’t have the resources to make a financial contribution. The people who start and operate non-profits do so out of passion. They come from the heart, and they will love you for sharing their vision and supporting it with your time, effort and spirit.

And they won’t be the only beneficiaries. There is significant research, including that which my partner, Wes Moss highlights in his book “You Can Retire Sooner Than You Think”, indicating that retirees who stay engaged with the world – family, friends, community – live longer, healthier, happier lives.

The decision on where to employ your resources is very personal. You want to support causes that resonate with you personally, and groups that are effective. As with any investment decision, you’ll want to do your homework. If you live in my hometown of Atlanta, and are looking to make a significant philanthropic gift, the Community Foundation of Greater Atlanta (CFGA) is a wonderful resource. The CFGA works with individuals and financial planners to match donors with charities and non-profits.

As an entrepreneur, I see a business opportunity here. Imagine a website that did on the national level what the CFGA does here in Atlanta. You’d enter your skills, interests and availability, and be presented with a list of local, national or international non-profits that need your help. The site could even help identify your passions, and, after your placement, provide an accountability function to ensure both sides are happy with the arrangement.

But you don’t need to wait for someone to jump on my idea. Just get out there and follow your passion. You can’t take it with you. So, why not start paying it forward in retirement?


Why Stock Market Valuations Matter

As the stock market has risen to near record highs in recent months, some investors have been asking whether it’s still a good time to get into stocks. The answer lies in the concept of investor participation vs. investor perfection. History shows that even investors who had bad timing when buying into stocks, but who stayed in the market for five or more years, ended up making more money than if they had just sat on their cash.

That said, when you enter the market can have a significant impact on your returns, especially in the short run.

Imagine jumping into the stock market in July 1990. Six months later, the S&P 500 was off 15 percent. How about getting started in March 2000? Over the following year, the S&P 500 fell 25 percent.

Starting in October 2007? Twelve months later, the S&P 500 was down 42 percent.

These Great Moments in Bad Timing have much in common. They were followed by recessions and stock market corrections. But perhaps more importantly, they were all preceded by periods of excessive valuation. In 1996, Alan Greenspan referred to this as “irrational exuberance,” a phrase that hearkens back to investors paying too much for what really matters in investing — earnings/profits.

Valuation is the process of determining what a company or a group of companies is currently worth. Essentially figuring out an enterprise’s intrinsic value — based on profits.

Let’s explore what happens to markets during different periods of valuation. In order to do so, we need to shift our focus from the market’s odometer (the market level) toward what we’re paying for that odometer reading (valuations), be it above, below or right on the “sticker price.”

Let’s walk through why valuation, expressed as a stock’s Price Earnings Ratio (P/E), matters — and then plug that into our bigger worldview.

In its basic form, P/E is simply an investment’s price tag — the price we pay divided by what we expect to earn each year from that investment. When looking at stock market-related investments, we’re typically talking about an index or group of stocks like the S&P 500 or an individual stock divided by a dollar number. For example, say the S&P 500 level is roughly 2,400 and expected earnings are $135 for the next year. Divide 2,400 by $135, and we get 17.75. Let’s round it and call it 18 as the current market’s P/E level.

Now let’s pop these numbers into our odometer analogy. The 2,400 number is the odometer’s level. The number 18 is what we’re paying for the odometer, and herein lies the real key. Our P/E is what we’re paying for each $1 of earnings. That’s paramount for us as investors.

Historically, we’re better off getting into stocks when valuations are low. Why? Because that means stocks are cheaper relative to what they’re earning.

Here’s a quick example of how valuations work using an investment property for the sake of simplicity. Patricia can buy rental home A for $100,000 and receive $20,000 in annual rent. She could essentially pay five times the rental income should she purchase this investment. House B, on the other hand, costs $100,000 and pays $10,000 in rental income. In this case, Patricia would be paying 10 times the rent should she purchase this investment. Assuming the homes are equal, it’s a much better deal to buy house A. It’s a similar concept when looking at the stock market.

With assistance from the Ned Davis Research Group, I went back and analyzed stock market returns when investing at different valuations (or market price tag levels) from 1928 until 2016. What was I looking for? How markets fare on average over the next year when the P/E ratio is high versus midrange versus low range.

When Stock Market (S&P 500) P/E levels are:

1. Below “sticker price” (9.5 and lower) — In this P/E range, stocks would be considered “on sale.” Historically, of the three categories, this has produced the highest market returns over the following year. On average, 20 percent a year. That’s right, per year.

2. At “sticker price” (9.5-16.5) — In this range, stocks are considered fully or appropriately valued. Historically, returns over the next year have come in around 5 percent per year.

3. Above “sticker price” (16.5 and higher) — In this range, stocks begin to enter the “expensive” territory. Historically, returns are relatively flat over the next year.

What do these numbers illustrate at their essence? That yes, valuations matter.

Commit this next point to memory: It’s not about the market’s odometer level; it’s about what we are paying for the current odometer level.

Today, we are hovering at 18 times earnings. Back to our analogy, we’re paying just north of “sticker price” for the market’s current odometer reading. To put our current level into further context, before the bear market of 2000-2001, the S&P 500 was trading at a whopping 36.5 times earnings, or twice as expensive as where we are today.

An important point to note here is that we don’t stay in any of the sticker price ranges forever. Instead, we flow in and out of the categories listed above as the market changes and shifts.

Add these two words to your list of investment truisms — valuations matter. Now, as a hopefully more informed investor, you can incorporate this truism into your larger, overarching investment strategy.

Wes Moss has been the host of “Money Matters” on Ne


Investment Success Is More About Participation Than Perfection

Let’s consider a question. I’ll bet you’ve asked yourself this particular question over the past six months or year. As the Dow has climbed through 19,000 and now is hovering close to 22,000, I’m guessing you’ve wondered something like the following: “Should I have more money in the market?”

If you haven’t had this exact thought, perhaps you’ve looked at some of your cash, or some of your bonds as they sit placidly, and questioned: “Maybe I should have put that money into stocks, but now the market is too high, so maybe it’s too late and I’ve missed the boat.”

Herein lies the conundrum of investing. Believe me, I hear it all the time: “Hey, Wes, should I get in now?” Because I know folks don’t want to “time” the market wrong. And it’s a natural thing — no one wants to have “bad timing.” I’ve gotten some iteration of this question a lot lately, and for good reason. The market, despite the pullback, is still within striking distance of an all-time high. And as investors, we often feel like we must have good timing to achieve investment success.

Here’s a newsflash: Investing success is less about perfection and more about participation. Period.

We’re going to dig deep on this one and go through the numbers to illustrate my point. Before we do, I want to tell you just how pervasive the concern about timing is among investors. Just recently, I received a question on this exact point from a radio listener during “Money Matters” (News 95.5 and AM 750 WSB radio). Here’s what the caller said:

“Hey, Wes, the market is near an all-time high, and I’ve been sitting in cash for half of my portfolio. I feel like I missed out and want to get back in at some point. When do I get into stocks? Do I wait until the market drops, then get in?”

It is a question about timing. But remember, as long as you have time (meaning years, not days), the amount of time you are invested handily trumps how you timed your purchase, i.e., when you “got in.”

Of course, this is one of the toughest questions to answer in investing. Naturally, we all want to buy low and sell high. We don’t have a Stargate in our bedrooms, however, to clue us in on what markets will do next week or next month. It’s simply impossible to know.

So what if we strategize to wait for a correction, you may wonder. Even if we do and we get one, it’s widely understood that most investors won’t actually pull the trigger when markets are down. The very fear that led to the correction is what stops investors from buying in when markets swoon.

Our real answer lies in the data that compares what you would get staying perpetually in cash versus getting invested. More specifically, the answer comes to life when we look at the difference in growth between getting in the market (using the S&P 500) at the “perfect” time, and getting in the market at the “worst” time. The data here is clear.

As promised, let’s look at the numbers. These data points illustrate how an investment of $10,000 in the S&P 500 grows over a particular period of time. Each period given is relevant in that the years described were on the precipice of a stock market correction. Of course, it takes time to recover from any downturn, so the data points show what you would have as of 2016 if you had chosen to invest the $10,000 during each unique starting point.

What’s key here? The data gives us the results for “perfect” market timing (meaning when the correction is at its nadir), and the “worst” market timing (meaning right before the market dipped), vs. simply holding your money in cash or CDs. Here’s how the numbers compare for the time periods of a 25-year long run, 17- and 15-year intermediate runs, and eight- and five-year short runs.

  • Long Run — 25 Years — Investing in 1990

The year 1990 saw a four-month bear market.

Investing at the “perfect” time (the bottom of the correction) shows growth to $113,000.

Investing at the “worst” time (right before the correction) shows growth to about $100,000.

Holding cash/CDs would have resulted in $20,000.

  • Intermediate Run — 17 Years — Investing in 1998

In 1998, the market saw another near 20 percent correction.

“Perfect” timing yielded growth to $29,000.

“Worst” timing yielded growth to $25,000.

Cash grew to $14,000.

  • Intermediate Run — 15 Years — Investing during the 2000-2002 period

Oh, yes, we all remember the tech crash. It was massive — the S&P 500 went down more than 49 percent.

Getting in the market with “perfect” timing yielded growth to $30,000.

Getting in with the “worst” timing yielded growth to $18,500.

Cash grew to $13,000.

Here, investing at the “worst” time still bested cash by 42 percent.

  • Short Run — Eight Years — Investing during the 2007-2009 period

Just like the tech crash, the Great Recession/Financial Crisis market period is fresh in our memories.

During this time, “perfect” timing yielded growth to $29,500.

The “worst” timing yielded growth to nearly $16,000.

Cash was practically flat, as interest rates were near zero during this span.

Investing at the “worst” time still beat cash by 54 percent.

  • Short Run — Five Years — Investing in 2011

This time period again saw another near 20 percent correction.

“Perfect” time investing yielded growth to $18,000.

“Worst” time investing yielded growth to $16,500.

Again, cash was practically flat, garnering growth of a mere $13.

This time, the “worst” timing beat cash by 66 percent.

The above data references an infographic that Charles Schwab published in February titled “Is There Ever a ‘Bad’ Time to Invest?”

Understanding this market history helps us to focus in on what really matters in investing: participation, not perfection. In every scenario outlined above, investing at the “worst” time bested holding cash by a long shot.

And this market history reminds us again about the importance of time. And when I say time, I don’t mean 100 years. We’re talking about five, eight or 15 years. Every one of you reading this has that much time. At least we hope that’s the case.

So to answer the question that’s been nagging you, the answer is in the context of participation and time, not in the unrealistic goal of market timing perfection. While we tend to think about investing in terms of what our money may be worth in a year or two, this is the wrong context. The right context is looking out over at least five years. And 10 years? Even better.


The original AJC article appears here.



Do Recent Stock Market Highs And The Real World Economy Match Up?

Imagine this — you’re on a cross-country road trip. You’ve mapped the 2,800-mile distance between San Francisco and Washington, D.C., charted your course, and now you’re on the open road, cruising along at 60 mph with the wind in your hair. Life is good, right?

Now imagine that you’re on the home stretch, with only 400 miles until your destination point, and traffic slows to a crawl. You drop from 60 down to 39 mph. It feels like a snail’s pace, and it’s going to be that way for the rest of your drive. Enter a longing for the 60 mph clip, and frustration for the remainder of the journey.

This is precisely how many Americans feel about our current economy. Yes, the overall economic picture in the U.S. is relatively good, but few would describe it as “gangbusters.” So as U.S. stock markets have continued to close at all-time highs, the ho-hum pace of economic growth has created a sense of unease for many investors due to this disconnect.

Over the past several months, I’ve continuously heard the following from investors, “Hey, Wes, the economy doesn’t seem to match the stock market.”

Before we look at where we are now, it’s important to also look at some economic history. From 1965 until 2008, the U.S. economy grew 3.1 percent per year on average. Since the Great Recession, we’ve been growing at 1.9 percent on average. While at first glance these numbers don’t seem exceptionally far apart, consider that they represent a 35 percent slowdown in what was a more than 40-year trend. Hence, our economic speed feels like 39 mph, down from 60 mph.

Where are we now? The most recent jobs report indicated that July ushered in 209,000 new jobs, and the unemployment rate fell to 4.3 percent. But wage growth is still stuck at the same modest, uneventful 1.5 to 2.5 percent annual growth rate since 2010.

These numbers could explain some of our frustration. While the unemployment rate is low, we aren’t seeing the accompanying wage growth of between 3 and 4 percent per year like we did for the three decades before the Great Recession.

We as humans don’t do well with uncertainty or stagnation. We expect something to happen. We expect things to get better. Or worse. Something. So when we’re entrenched in a slow growth economy — the 39 mph economy — our human psyche conjures up a sense of anxiety.

Sure, we know markets are hitting all-time highs, but most American families aren’t really buying it. The Dow is near an all-time high, but we don’t believe that business is the best it’s ever been. This disconnect is the culprit. The difference between how the stock market is faring and how we interpret the real world economy is what’s making us suspect.

From my experience, this is the state that a lot of folks are in — they’re uncomfortable with the disconnect between today’s “great market” and “just OK” real world economy. Factor in the market-related catastrophes we’ve lived through in the past 17 years (2000-2002 and 2007-2008), which feel like just yesterday, and no wonder we are unsettled.

But isn’t the stock market a barometer for how the economy is doing, and doesn’t it say we’re doing well? The short answer is yes, and yes. The stock market gives us a big numerical measure of corporate and economic health. But the less reported, more subtle tide of the economy matters more to most families.

For starters, we’re heading into the market correction months of August, September and October. Student loans are tipping in at $1.3 trillion. And then there’s the dual-income housing trap. Studies have shown that two-income families are more at risk than their single-income counterparts to fall short on their mortgage payments. Since 1975, the Equal Credit Opportunity Act has essentially encouraged dual-income households to take on bigger mortgage payments. As a result, more households are at risk of foreclosure if one earner loses their job.

And let’s not forget about the ongoing health care conundrum. We’re still staring into the unknown when it comes to the future of health care costs. If anything, the cost of care continues to rise.

Right now, you’re saying, “Wes, thanks for sharing all of the problems, but what’s a nervous investor to do?”

First, don’t panic. You have time. Investing is a marathon, not a sprint. I’ve said it before and I’ll say it again — we feel the 15/50 Stock Rule is a prudent way to view your long-term investment strategy. If you believe you have more than 15 years of living left to do, we believe your portfolio should consist of at least 50 percent stocks, and the remaining balance in cash and various bonds. This rule seeks to help investors strike a balance between risk and reward.

Second, remember to acknowledge there are a multitude of things happening in our economy that aren’t highly publicized, but make big statements nonetheless. Dividend increases are an example of this. Take, for instance, Caterpillar Inc. The company recently raised its quarterly dividend by a penny. This doesn’t sound like much, but let’s do the math.

Caterpillar has about 600 million shares. One penny per quarter equals 4 cents per share, which translates into a $24 million increase in what this company pays out to investors. That’s on top of the existing dividend. Today, the $3.12 per share price equates to almost $1.9 billion per year. A small increase like this is actually a very big deal.

Finally, remember the “Rich Ratio.” Your Rich Ratio is the amount of money you have in relation to the money you need to realize your dreams. In essence, this is a real number that can reassure you that you’re in a good place based on your income, investments and projected retirement needs. To calculate your Rich Ratio, take the amount of monthly income you should have or do have in retirement (Social Security + pension + any additional steady income streams), including what your nest egg should produce, and divide it by what you expect to spend each month to live the retirement you want. Your “have” divided by your “need.” Once adjusted for taxes, if your ratio comes in at over 1.0, you’re in good shape, no matter the ups and downs of the market and overall economy.

While uneasiness about our current stock market relative to the economy may reign supreme, it’s important for us to rein in our emotions. Remember, our economy has more storylines than “Game of Thrones.” Don’t get fixated on the dragons; look at the big picture as you take stock of your financial future.




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