Stock market volatility recently returned to normal levels after a few years of abnormally low volatility. It’s a good time to remind ourselves how to take advantage of this very natural dynamic of investing rather than be deceived by it.
Here are five important reminders:
1. Volatility is your friend.
The very reason equity markets offer the possibility of higher returns than saving or investment vehicles with less perceived risk, such as U.S. Treasury Bonds or Certificates of Deposits (CDs), is the higher risk and greater volatility associated with such holdings.
This is called the risk premium, something investors as a whole build into liquid, open, transparent financial markets every business day of the year around the world.
For instance, the S&P 500, over the last 90 years returned about 10% per year.* However, there were very few individual years it actually returned that amount. The reality is that in 40 of the 90 years, the index was up more than 20% or down more than 20%.
So, remember, the premium (return over less risky assets) you are seeking to receive in risk assets is precisely for accepting the bumpy ride associated with the investment vehicle.
So long as you genuinely are a long-term investor who can ride out the bumps to the level you have accepted, history demonstrates you can be fine. Exhibit 1 illustrates the long-term historic view of what broad asset classes look like: **
January High-5 from Janiczek
A monthly recap of articles designed to inform and inspire on a variety of topics related to investing and wealth management.
In this edition:
- 2019 Outlook / 2018 Top Takeaways and Market Review
- Investing in Volatile Markets
- Wealth & Health in 2019
- More Freedom in 2019
- All for One, One for All
Joseph Janiczek, founding partner of Janiczek Wealth Management, recently wrote the following article about a project underway with Dr. Jeffrey Gladden, an interventional cardiologist and founder of APEX.
Within their respective disciplines, Mr. Janiczek (Wealth) and Dr. Gladden (Health) both advocate integrative, evidence-based programs tailored to the individual. Both recognize disciplined, pro-active resource management promotes performance optimization. Each pursues methods to help minimize risk, foster confidence, and support personal life goals.
However, even more remarkable than such parallels is the potential of wealth and health added together. -Cathy Wegner
The Wealth + Health + Longevity Breakthrough
Jeffrey Gladden, MD, a world-class longevity expert and founder of APEX, and I have discovered that it is quite beneficial to comprehensively look at wealth, health and longevity in an integrated way.
The Stages of Financial Freedom with Longevity animated illustration below shows the profound impact longevity has on wealth and the new possibility of reclaiming health and extending longevity that is now possible as a result of breakthroughs in medicine.
Exhibit 1: The Stages of Financial Freedom® with Longevity
Working together, we discovered two breakthroughs are possible, when looking at this dynamic together, that can be quite additive to proactive wealth management and optimum health management:
- The possibility of reclaimed health and expanded longevity brings an ideal financial mindset into play that can help you think, act and stay in peak financial form.
- The possibility of reclaimed wealth vibrancy brings an ideal resourcefulness mindset into play that can help you think, act to stay in peak health/fitness form.
- Ten years after the 2008 market meltdown, U.S. equities are up over 200% and posting fresh new all-time highs.
- Higher interest rates during the quarter presented some headwind for bond investors, but bonds can still generate decent returns within a long-term trend of higher interest rates.
- The underlying economy boasts plenty of strength, with economic growth during the rest of 2018 expected to remain above 3%.
The Art and Science of Getting and Staying “On a Roll”
I love adapting engineering and physics concepts to solve common financial problems many people, even financially savvy people, encounter all the time. That’s why I’m so excited about my latest invention, the Wealth Allocation Wheel.
The challenge, in simple terms, is “staying on a roll.” There is an art and science to staying on a roll with your wealth. This means having enough inertia with your wealth to successfully navigate the Stages of Financial Freedom (see Illustration 1). The clear aim I have written about extensively is how to achieve controlled growth while avoiding short or long periods of stagnation or depletion.
Brady Siegrist, CFP, Managing Director of Wealth Management at Janiczek Wealth Management explains how the color-coded Wealth Optimization Dashboard, a key exclusive feature of Janiczek’s patented system, can help all clients, regardless of their net worth, business knowledge, age or investment savvy.
We monitor and measure things everyday. We glance at our speedometer to confirm we are not exceeding the speed limit. Thermometers tell us if we are running a fever or if our outside plants are in danger of freezing. A scale lets us know if an envelope requires extra postage. Think of all the diagnostic tests that report plusses and minuses of our physical well-being. How, then, do we measure our financial well-being? Why does financial strength matter?
Strength = Durability
Contrary to what some may assume, the number of digits it takes to record a person’s net worth is not an indicator of his or her financial strength. Size does not determine financial strength. Rather, durability is the measure of strength.
Powerful changes in today’s world are empowering individuals and consumers like no other time in history. But as our employment, political and social circles rapidly change, we seek ways to cope, survive and thrive under these new circumstances. While providing tremendous opportunities on one end, they challenge our beliefs and security blankets on the other. These changes can at first seem alarming because they not only allow us to be our best but actually demand us to be our best. How do we handle all of this change? What do we do?
The turbulence of our times demands strong finances and habits that can be effective in all economic climates. With the breakdown of employment security, it is a dangerous moment in history not to have our finances in tip-top shape. To face the future with poor financial flexibility and stamina creates a severe disadvantage. Therefore, the economic and job stability we cannot find in the outside world must be created within our own personal finances.
While the S&P 500 remained near its all-time high, the recent massive selloff in the technology sector went mostly unnoticed. But for investors who follow the so-called “FANG” stocks (Facebook, Amazon, Netflix, Google) the hit was painful: About $60 billion in value was wiped out in just one afternoon, representing the largest selloff in nearly 2 years.
The wipeout was a function of just how big these companies have become and the position they are in with new tax reform looming. Tech companies are expected to receive little benefit given its already-low average tax rate of 18.5% (below the 20% proposed rate).
This has caused investors to rotate out of the tech stocks and into the financial services sector, which stands to benefit more from a corporate tax rate that would drop from the current 35% to 20%.
Interestingly, the S&P 500 was relatively unaffected while this rotation into financials and out of tech ensued. The index’s volatility actually remained low, as did correlations among the S&P 500’s member stocks.
In other words, the diversity offered by the S&P 500 Index allowed for the index too remain relatively unscathed by the trading within the tech and financial sectors, a key reminder to investors that having proper exposure across the markets continues to be important with the S&P 500 near its all-time high.
What Are Your Own Possibilities?
Sometimes, the pursuit of wealth can leave a void in our lives—a place left empty because we lacked the energy or time to pursue a dream. There is a saying: “Wealth is not an end, it is a means to an end.” The problem is that the complexity of creating wealth and the subsequent financial planning often gets in the way of seeing and pursuing an end truly aligned with your highest purpose in life.
My life’s work has been focused on this critical unmet need. I hope to help people see the possibilities that open up once you escape from the chaos and confusion that characterize so much of the wealth management field today. I absolutely know it is possible to put a large portion of wealth management on automatic; I have built the system, structure, support and discipline to achieve this; and I’ve seen how using these benefits helps people define and achieve their highest ambitions. This approach is both effective and rewarding.
Clients are surprised sometimes when I ask them about their higher purpose and possibilities. It is not that they feel I’m prying; they just don’t expect an advisor to be concerned with such matters. I tell them that these are the most important questions for them to consider when it comes to financial planning.
Hiring a financial advisor can be a smart and profitable decision: As we detailed in a recent blog article, advisors using industry best practices can help their clients earn a significant investment premium.
There’s a catch, though. Not all financial advisors do the right thing, consistently, for their clients. Surprisingly, the great majority of financial advisors are under no legal obligation to put their clients’ financial interests ahead of their own.