Surprise! No Selloff in 2013

So – how smart are the prognosticators?  Westin Wellington addresses this subject in a way that will make it clear to you that you probably shouldn’t be spending too much of your energy listing to “Gurus”.

Enjoy the article – and let me know what you think.

Steve

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The unusually strong performance of US stocks in 2013 was a welcome surprise for investors who are following a simple buy-and-hold strategy and a source of exasperation for many professionals caught flatfooted by the steady rise in share prices.

It was the best year for the S&P 500 Index since 1997, with a total return in excess of 32%. The size and value dimensions were even more rewarding: 2013 was the best calendar year since inception for the DFA U.S. Large Cap Value Portfolio, while the DFA U.S. Micro Cap Portfolio had its second-best performance in 32 years of operation.

To some experts, it wasn’t supposed to look like this. A Barron’s cover story appearing in November 2012 warned investors to “get ready for the recession of 2013.” The title of a Time article on the outlook for financial markets that same month shouted, “Why Stocks Are Dead” in oversize type. A prominent economic forecaster who predicted the downturn in 2008 suggested that four elements—stagnating US economic growth, the European debt crisis, a slump in emerging markets, and military conflict in the Middle East—could combine and lead to a “superstorm.”

Another prognosticator—and longtime Forbes columnist—ticked off a long list of worries, including a new wave of housing foreclosures, persistent government deficits, weak consumer spending, high unemployment, and unsustainable corporate profit margins. His prediction for 2013: “the S&P 500 Index drops to 800, a 42% decline.” Others fretted about a deepening slump in China that could drag the rest of the world down with it.

Detroit’s bankruptcy filing in July—the largest American city to do so—and the acrimonious debate over public finances in many cities and states suggested to some that a tectonic shift in municipal finance was underway with worrisome consequences. One prominent Wall Street researcher observed that “the aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.”

Individual and professional investors alike braced themselves throughout the year for a sharp selloff that never materialized. At times, the perverse reaction to rising prices was not delight but apprehension of an even steeper decline to come. On March 5, 2013, for example, the Dow Jones Industrial Average finally eclipsed its previous record of 14164.53, set in October 2007. But the Financial Times reported that the prevailing mood among veteran New York Stock Exchange floor traders was “more anxious than joyful.”

Month after month, a Greek chorus of financial journalists recycled the same arguments we have heard regularly for the past several years: Economic growth is well below average, stocks are expensive relative to earnings, corporate profit margins are historically high and can only come down, earnings growth is too weak, asset prices have been artificially inflated by an expansive monetary policy, and so on. A sample of headlines that might have unsettled investors appears below.

 

January 12 “Rebirth of Equities Ain’t Necessarily So,” Financial Times
February 8 “Scant Pickup in Economic Growth Seen for 2013,” Wall Street Journal
March 7 “Stock Markets Defy Economic Woes,” Financial Times
April 2 “Lesser Expectations: Earnings Hopes Dim for First Quarter,” USA Today
May 18 “Stock Market Optimism on This Scale Hard to Explain,” Financial Times
July 7 “As Investors Rush in, Stocks Are Sending Warning Signals,” Wall Street Journal
August 24 “Lofty Profit Margins Hint at Pain to Come for U.S. Shares,” Wall Street Journal
September 18 “Profits Boost Needed for Wall Street’s Equities Run,” Michael Mackenzie, Financial Times
October 7 “Get Ready For a Drop in Stock Prices,” Shefali Anand, Wall Street Journal
November 16 “Is This a Bubble?” Joe Light, Wall Street Journal

 

With so many economic hobgoblins to frighten them, many investors found it easy to dismiss more positive developments as unsustainable or irrelevant. Auto sales, for example, have been surprisingly strong in recent years, but investors could find plausible reasons for caution in 2013. A New York Times financial reporter observed, “After steady increases for decades, Americans are driving less. … Walkable cities are growing faster than suburbs. And wherever people happen to move, they are buying smaller, more fuel-efficient cars. … All this means that autos—one of the biggest industries in the United States—will not soon regain the explosive growth of the early 2000s.”

Some Americans are indeed buying more fuel-efficient cars; electric-only Tesla luxury sedans are popping up in driveways in tony neighborhoods across the country. But many other Americans are eagerly signing contracts for powerful full-size pickup trucks; light-duty truck sales were up roughly 20% through November, and the Ford F-150 continues to be the best-selling vehicle in America by a substantial margin. Last year turned out to be a rewarding one for shareholders of most auto manufacturers and suppliers as well.

Selected Automotive Stocks: 1-Year Total Return as of December 31, 2013

Tesla Motors (TSLA) 344.14%
Visteon (VC) 74.32%
Johnson Controls (JCI) 69.84%
Magna Intl (MGA) 66.61%
General Motors (GM) 41.76%
Paccar (PCAR) 34.64%
Cummins (CMI) 32.18%
Ford Motor (F) 22.24%

Source: Morningstar (www.morningstar.com), accessed January 2, 2014

What can investors learn from this year’s market behavior? Most of us accept the idea that predicting the future is difficult. And predicting how other investors will respond to unpredictable events is harder still. But, for some of us, the temptation to engage in such efforts is irresistible. If only we could do so, we could be so much wealthier, have the satisfaction of outwitting other clever market participants, and make ourselves more attractive to members of the opposite sex. But results from this past year tell us we should be skeptical of our ability—or anyone else’s—to do this well enough to outperform a simple buy-and-hold strategy. When investors are studying the long-run record of US stock market returns several years from now, we suspect many of them will find it difficult to recall exactly what it was that they were so worried about and discouraged them from pursuing the capital market rewards that were there for the taking.

References

“Are We Headed for a Recession?” Barron’s, November 12, 2012.
Rana Foroohar, “Why Stocks Are Dead and Bonds Are Deader,” Time, November 26, 2012.
“Roubini: Perfect Storm or Not, 2013 Will Be Bumpy, Risky,” Moneynews, November 18, 2012.
A. Gary Shilling, “Prepare for a Market Plunge,” Forbes, January 21, 2013.
Meredith Whitney, “Detroit May Start a Wave of Municipal Bankruptcies,” Financial Times, July 24, 2013.
Adam Davidson, “What’s it Going to Be, 2013?,” New York Times, January 6, 2013.

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Charitable funds: Not just for billionaires

They aren’t super-rich, and they aren’t bankrolling big foundations. They’re average investors who have saved and invested responsibly for years. Now, a growing number of them are setting up “mini foundations” to help make the most of their hard-earned charitable dollars. 

Ranging from twenty-somethings to octogenarians and up, these investors are finding that using a donor-advised fund DAF can be much easier than giving directly to dozens of different charities each year — and less hassle than establishing their own private foundations.

According to charitable-giving experts, donor-advised funds:
– Simplify charitable giving by helping you plan and organize donations
– Make it easier to donate not only stocks and bonds but non-public and less liquid assets such as art, collectibles and real estate
– Require less paperwork and are less costly than private foundations
– Help with financial planning by making it easier to budget
– Provide tax benefits that can make your charitable dollars go farther

“They’ve absolutely been growing in popularity,” says Amy Danforth, senior vice president at Fidelity Charitable Gift Fund, an independent public charity with a donor-advised fund program established in 1991. Since that time, “We’ve had double-digit compound annual growth in the number of accounts established,” she says.

via Charitable funds: Not just for billionaires.

3 Wealth Destroyers to Fight Ferociously

This is an excellent article about how to protect your wealth.

Steve

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When financial planner J. Landon Loveall was a teenager growing up, he says, “I guarded my Lego creations with life and limb from the destructive nature of my little sister.” Loveall is founder and president of Cumberland Wealth Planners in greater Nashville, Tenn.

Creating wealth is not unlike building something solid with Legos, as discussed in the article “Steps to building wealth.” In the same way, you must protect your wealth from destructive forces, such as taxes and inflation, which can erode wealth. Add to these another wealth destroyer: overspending.

Tax strategies

Tax planning can help you save hard-earned dollars.  But to be effective, tax planning must be proactive.

While there are ways to minimize taxes, you can\’t avoid them completely. “On every gross dollar you earn, pay your taxes first,” says Rick Kahler, president of the Kahler Financial Group in Rapid City, S.D. “Estimate your total tax liability and be sure your employer withholds enough to cover it. If you are self-employed, set up a savings account, deposit a percentage of every check, and use that money to pay your quarterly estimated taxes. Never raid these funds.”

Planners generally recommend that high-income earners place assets that produce ordinary income (interest and short-term capital gains) into tax-deferred accounts. Assets that produce long-term capital gains and dividends can go into taxable accounts.

via 3 Wealth Destroyers to Fight Ferociously | Fox Business.

Annuity insurance For Market Crashes Has Risks

Rick Kahler does a great job discussion the Variable Annuities in this article.

Steve

 

Many investors, panicked by the market crash of 2008-2009, started a search for some type of investment vehicle to protect them from the next market downturn. Some decided the answer was a variable annuity with a “guaranteed living benefit” rider.

At first blush, this seems to be a good use of insurance. For a nominal cost, insurance helps us spread the risk of a catastrophe. Consider auto insurance. There is a very small chance I will total my car in the next year. It’s hard to predict whether that will happen, but one thing is sure, it is all or nothing. Either I will or I won’t.

However, predicting the number out of a large group of people who will total their cars becomes much easier. While we don’t know who will total their cars, we do know about what percentage of people will. This predictability allows an insurance company to determine the average number of claims and set an annual premium that covers the anticipated claims and generates the company a profit.

See the complete article here: Rick Kahler: Annuity insurance For Market Crashes Has Risks | Kahler Financial Group.

New Year’s Questions – An Exercise to Begin 2014

New Year’s Questions

I picked these questions up at a wonderful workshop I attended a few years ago and have found them very  useful.

Before beginning a new year in full force, it can be supportive to complete and acknowledge the previous year. I hope that spending a few minutes with the following questions will help you complete 2103 and start 2014 on a strong note!

Completing and Remembering 2013

  • What was your biggest triumph in 2103?
  • What was the smartest decision you made in 2103?
  • What one word best sums up and describes your 2103 experience?
  • What was the greatest lesson you learned in 2103?
  • What was the most loving service you performed in 2103?
  • What is your biggest piece of unfinished business in 2103?
  • What are you most happy about completing in 2103?
  • Who were the three people that had the greatest impact on your life in 2103?
  • What was the biggest risk you took in 2103?
  • What was the biggest surprise in 2103?
  • What important relationship improved the most in 2103?
  • What compliment would you liked to have received in 2103?
  • What compliment would you liked to have given in 2103?
  • What else do you need to do or say to be complete with 2103?

Creating 2014

  • How will you acknowledge those who most impacted your life last year?
  • What would you like to be your biggest triumph in 2014?
  • What advice would you like to give yourself in 2014?
  • What is the major effort you are planning to improve your financial results in 2014?
  • What would you be most happy about completing in 2014?
  • What major indulgence are you willing to experience in 2014?
  • What would you most like to change about yourself in 2014?
  • What are you looking forward to learning in 2014?
  • What do you think your biggest risk will be in 2014?
  • What about your work are you most committed to changing and improving in 2014?
  • What is one as yet undeveloped talent you are willing to explore in 2014?
  • What brings you the most joy and how are you going to do or have more of that in 2014?
  • Who or what, other than yourself, are you most committed to loving and serving in 2014?
  • What one word would you like to have as your theme in 2014?