5 Good Minutes: Potshots

Potshots: Marijauna Stocks – the next version of dot coms?

blank

In the late 1990’s the dot com stocks made headlines due to their rapid gains.  More recently it was the crypto-currency led by Bitcoin.  Now marijuana stocks are taking center stage as the next hot investment topic.  In today’s episode of five good minutes we’ll take our potshots at the latest headline stealing topic.

Legalized marijuana has created a new and untapped industry.  Pot sales are legal in some form in 30 states. And in October, Canadians will be able to buy cannabis for recreational use.  Right now it is the new shiny thing in the investment world, but in many ways, these companies are much like the dot com stocks of the early 1990’s.

In the next five minutes, we’ll talk about the latest fad.

For more about investing in retirement, including videos about risk, please visit our retirement learning center.

August Investment Market Update

[et_pb_section admin_label=”section”][et_pb_row admin_label=”row”][et_pb_column type=”4_4″][et_pb_video admin_label=”Market Update Video” src=”https://youtu.be/NHtI1mqjIG0″ /][/et_pb_column][/et_pb_row][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font=”Arial||||” text_font_size=”20″]

In this month’s update, we recap how the stock and bond markets performed.  We also discuss the end of the latest stock market correction.

Click on the video to watch.

 

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font=”Arial||||” text_font_size=”20″]

It’s been a good year, so far…

The US Stock market has had a good year so far.  And, most broad segments of the stock market have participated in the increases.

Fist the large company stocks as measured by the S&P 500…

[/et_pb_text][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/09/SP600-web.png” alt=”Update” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” /][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font=”Arial||||” text_font_size=”20″]

Mid cap stocks have also done well, but their gains have been more modest.

[/et_pb_text][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/09/SP400-web.png” alt=”Update” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” /][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font=”Arial||||” text_font_size=”20″]

Small Cap stocks have been the big winners thus far.

[/et_pb_text][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/09/SP600-web.png” alt=”Update” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” /][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font=”Arial||||” text_font_size=”20″]

A Different Story for Bonds

Interest rates rose early in the year.  And when interest rates increase, bond prices decrease.  The broader bond market had a good month, but it wasn’t enough to erase the declines from earlier in the year.

[/et_pb_text][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/09/BondGraph-web.png” alt=”Update” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” /][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Data Source: Standard an Poors.  The S&P 500, S&P MidCap 400, S&P Smallcap 600, and the S&P Aggregate bond indexes are unmanaged indexes used to represent the performance of certain segments of the investment markets. An investment cannot be made directly in an index.  Past performance does not predict future results, and the rates of return shown are not guaranteed.  Investing involves risks, including the potential loss of principal.  Please consider all risks before making an investment.  Your actual investment results could be better or worse than what is shown.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]

Volatility

[et_pb_section admin_label=”section”][et_pb_row admin_label=”row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

In our last video, we talked about the first correction we had experienced in over two years.  In this video we will discuss the increased  Volatility and how it compares to previous years.

Video:  Stock Market Volatility 2018

[/et_pb_text][et_pb_video admin_label=”Video” src=”https://youtu.be/dNjR_6wrNRI”]

 

[/et_pb_video][et_pb_text admin_label=”Click Here” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Click Here to watch on YouTube

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Stock prices fluctuate.  Volatility measures how much prices change from one day to the next.  The majority of the trading days over the past fifty years moved less than 1%.  Sometimes prices change in more extreme ways.  Price moves of between 1 and 2% happen with some regularity.  Bigger moves happen too, but those occur less frequently.

Today a 1% move in the Dow Jones Industrial average is approximately 250 points.

[/et_pb_text][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/05/Volatility_1.jpg” alt=”Volatility” title_text=”Historical Volatility” show_in_lightbox=”off” url_new_window=”on” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” url=”https://flemingwatson.com/wp-content/uploads/2018/05/Volatility_1.jpg”]

 

[/et_pb_image][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Volatility has increased in 2018.  Last year there were only 10 total days when stock prices moved more than 1 %.  That has changed in 2018.  How does this compare to the historical averages?

[/et_pb_text][et_pb_image admin_label=”Volatility 2″ src=”https://flemingwatson.com/wp-content/uploads/2018/05/Volatility_2.jpg” alt=”Volatility” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” url=”https://flemingwatson.com/wp-content/uploads/2018/05/Volatility_2.jpg”]

 

[/et_pb_image][/et_pb_column][/et_pb_row][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

But how does 2018 compare to other years?  The volatility we have seen so far would rank 2018 the 12th most volatile year of the last half century.  One third of the days this year have experienced a price change of 1% or more.  Compare that to 2008.  In 2008, more than half of the trading days experienced a price change of over 1%.

[/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2018/05/Most-volatile-days.jpg” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” url=”https://flemingwatson.com/wp-content/uploads/2018/05/Most-volatile-days.jpg”]

 

[/et_pb_image][/et_pb_column][/et_pb_row][/et_pb_section]

Updating The Asset Allocation Quilt

[et_pb_section admin_label=”section”][et_pb_row admin_label=”row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Title” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

The Asset Allocation Quilt 2003-2017

[/et_pb_text][et_pb_text admin_label=”Intro” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font_size=”16″]

Some people refer to the picture below as an asset allocation quilt. Others might call it the “periodic table of investment returns.”  It resembles the chart of elements we used to see in science class.

(Click here to download a page sized pdf file of the chart.  You can download Adobe Acrobat Reader for free here).

[/et_pb_text][et_pb_image admin_label=”Allocation Quilt” src=”https://flemingwatson.com/wp-content/uploads/2018/01/Allocation-Quilt.jpg” alt=”Asset Allocation” title_text=”Asset Allocation Quilt 2017″ show_in_lightbox=”off” url_new_window=”on” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid” url=”https://flemingwatson.com/wp-content/uploads/2018/01/Allocation-Quilt.jpg”] [/et_pb_image][et_pb_text admin_label=”Not to be Confused with” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” text_font_size=”16″]

You can see why some refer to it as the “Periodic Table of Investment Returns”

[/et_pb_text][et_pb_image admin_label=”Actual Periodic Table” src=”https://www.chemicool.com/images/periodic-table.png” alt=”Asset Allocation” show_in_lightbox=”off” url_new_window=”off” use_overlay=”off” animation=”left” sticky=”off” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [/et_pb_image][et_pb_text admin_label=”What Are You Seeing?” background_layout=”light” text_orientation=”left” text_font_size=”16″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

What do You See?

Eleven asset classes make up the chart.  More asset classes exist, but these seem to be the most common.

  • Large cap, mid cap, and small cap US Stocks;
  • international stocks, emerging market stocks;
  • short, intermediate, and long-term bonds;
  • Alternative assets like real estate, basic materials, and gold.

The columns on the left rank the annual returns from best to worst for each asset class.  The columns on the right show the 3, 5, 10, and 15 year compounded returns of each asset class.  The compounded returns are also ranked from best to worst for each period.

[/et_pb_text][et_pb_text admin_label=”Observations Title” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Observations

[/et_pb_text][et_pb_text admin_label=”Constructing Portfolios is Hard. ” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Constructing Portfolios is Hard

Have you found any patterns which repeat?  Maybe you see something which indicates what is going to be either bad or good based on previous years.  No?  We don’t see anything like that either.  There are no real patterns to the annual returns.  This poses challenges when constructing portfolios.  That process would be much easier if there were patterns or some reliable indicator.

We believe these individual asset classes will continue to demonstrate similar characteristics for both volatility and total return over time, and make decisions accordingly.

[/et_pb_text][et_pb_text admin_label=”Extremes” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Extremes are Everywhere

Look at the green box which represents emerging market stocks.  This index represents countries with economic systems which would be considered primitive to what we have here in the US.   In the fifteen years shown, this index has either been one the two best or two worst performing asset classes eleven times.

Long Term Bonds also demonstrate extreme volatility.  When most people think of bonds, they don’t imagine those investments moving to those extremes.

[/et_pb_text][et_pb_text admin_label=”Volatility” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Volatility and Compounded Returns

Some asset classes move in more extreme ways than others.  US Stocks are a prime example of a volatile asset class.  The past fifteen years show returns all over the place, including a really ugly year (2008).   Short term bonds are the Opposite.  This asset class generated positive returns in every year shown.

Now look at the compounded returns.  Short-Term Bonds, while positive in each period, have either the worst or second worst compounded return.  Compare that to the three categories of US Stocks.

[/et_pb_text][et_pb_text admin_label=”Gold” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Gold

Gold was all the rage following the housing bust in 2008. From 2009 through 2012 gold prices increased for four straight years.  Remember the commercials touting how “now was the time to buy gold.”  The five years afterwards proved the exact opposite.

(Just remember this lesson as you continue to hear about things like Bitcoin)

[/et_pb_text][et_pb_text admin_label=”PRedictive power” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Lack of Predictive Properties

Returns occur somewhat randomly.  We make no predictions about what will happen next year or over the next fifteen years.  Certainly any of these returns shown are not guaranteed.  This information is meant to inform and educate.  We believe it is a useful tool to show you what can happen, both good and bad.  History, some say, often rhymes, but it rarely repeats.  Performance for these eleven assets will either be better or worse than what is shown, and it will almost certainly be different.  Just don’t be surprised if there are some interesting similarities as we march through time.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]

Download our March Client Letter

[et_pb_section admin_label=”section”][et_pb_row admin_label=”row”][et_pb_column type=”2_3″][et_pb_text admin_label=”Header” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Our March Client Letter

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Click Here, to read our March Client Letter.  In this issue we address our reasons to be both optimistic and concerned about the stock market in the next few years.

 

Thanks for reading!

 

[/et_pb_text][/et_pb_column][et_pb_column type=”1_3″][et_pb_image admin_label=”Image” src=”https://flemingwatson.com/wp-content/uploads/2017/03/March-2017-P1.jpg” alt=”March Client Letter” show_in_lightbox=”off” url=”https://flemingwatson.com/wp-content/uploads/2017/03/March-2017.pdf” url_new_window=”on” use_overlay=”off” animation=”left” sticky=”on” align=”left” force_fullwidth=”off” always_center_on_mobile=”on” use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [/et_pb_image][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Click Image to Open the pdf file in a new window

Adobe Acrobat Reader is free can be downloaded here

[/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

You can read our previous client letters on our blog page.  We publish our client letters in March, June, and September each year and mail them to our clients.  In addition, we make them available here on our website.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]