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Thoughts in Charts: How long do you have?

At a firm where one of our key investment principles is that “time matters”, I love a chart that show why we value it. Before I dig in though, let me say loud and clear that past performance does not guarantee future results. I use history to teach me, but I don’t count on it repeating itself.

I’ve told you before that I’m a skeptic by nature, so I’m going to start by focusing on the bottom of each range. These are the worst 1, 5, 10, and 20-year-end returns from 1950-2019. It’s the historical worst-case return.

The first thing that jumps out is that a single year downside in a diversified stock portfolio has been as bad as -39%. Got it. In a single year, it can be bad – really, really bad; however, there has historically been enough good that the 5-year worst return is much less negative at -3%. That is significantly better, but let’s be real, if I lose 3% over 5 years, I’m a little frustrated. Frankly, if I have been in the market for 10 years, and I lose 1%, I’m still frustrated.

Here’s how time matters: if I coached myself to stay steady through some of those frustrating 5 and 10 year periods, the 20-year stock portfolio would have resulted in the most beneficial range of returns for my long-term goals. A stock portfolio’s worst 20-year return over the last 69 years was positive 6% – better than a bond portfolio or a 50% bond and 50% stock portfolio. On top of that, it also had the larger upside periods.

Let’s take a step back and look at the blue bars representing a diversified bond portfolio and the grey bar representing a portfolio that is 50% stock and 50% bond. It’s clear that the bond portfolio can act as a ballast. For the end of each year over the 69-year period, a 50% bond portfolio never had a negative worst-case return in a period longer than 5 years.

If you are still tracking with me, I’m going to give you my favorite nugget from this chart. The best 10-year returns on a 50% stock 50% bond portfolio are the same as a bond portfolio, but their worst case is better! I tend to think about bonds helping to limit losses, but in the 10-year time periods, including stocks in the portfolio actually limited downside as well.

Time does matter.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: Long-Term Investing – Election Year Volatility

I can hardly help allowing the uncertainty that comes during a Presidential election year from creeping into my investor mindset.  I know many factoids about the market performance every four years when we elect a President.  Volatility is a certainty.  Typically markets perform well during election years and worse the year after, but nothing like this is written in stone.  In the short-term, anything can happen in the stock and bond markets.

We also observe that partisan government favors the markets in general.  It stands to reason that a President’s ability to enact legislation depends upon whether or not the House, Senate and President share the same political party.  Further, a President’s ability to push through radical policy change has many hurdles based upon the makeup of Congress.

Myriads of research and articles are available on the topic of the markets during and after election years.  Here is a link to an article I recently found interesting.

Here’s How The Stock Market Has Performed Before, During, And After Presidential Elections

Yet, I still find it difficult to not let the worry of the future creep into my mind.  I found the table below to be a helpful reminder of the impact maintaining a long-term view during short-term volatility especially during Presidential election years.  I’d be interested to know if this is helpful to you.


For disclosures, please click here.

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Choosing the Right Financial Road

When you don’t know where you are going, any road will get you there.  – Lewis Carroll.

This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going

In her recent CityBusiness article, Suzanne outlines 3 tips to choosing the road for your financial future. Click here to read more.

For disclosures, please click here.

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Thoughts in Charts: Municipal Bond Double-Take

I love when a chart makes you do a double take. When a chart makes you go “Yes!” but then after another minute “Oh”.

Because municipal bond yield is usually exempt from state, local and federal taxes, investors are willing to take less yield than they would for a treasury – thus the squiggly line is under 100 most of the time.

Cue 2020. Yield from 10-year yield from municipals is now better than what we can get from a 10-year treasury.

Wait, wait, before you think you figured out how to get some steady income from municipal issued bonds, it’s worth a pause to remember the math driving the line in this chart. The 10-year treasury yield (the base of the number) has gone from well over 2% to about .70%. It doesn’t take much muni yield to create a number that will graph higher than 100.

In fact, muni yield has been on a wild ride in 2020, but has settled out at an all-time low as well. Ouch! The main advantage of buying a municipal fund is the tax savings on the yield. Unfortunately, this space is also facing significant challenges as municipalities and states struggle with revenue losses during COVID. It is unclear how badly our local governments are struggling because their fiscal year has just ended, and they don’t report for several more months.

Clearly this is a space we are watching closely.

For disclosures, please click here.


Is a 60/40 Investment Allocation for Everyone?


One of the most important choices we have with our investments is the allocation of our dollars. How much will we invest in stocks, in bonds, or in any other assets? Large or small, growth or value?  Studies have shown that over 90% of the returns on our investments are driven by this very basic decision.  It should not be taken lightly, and many questions should be asked to help determine which allocation makes the most sense for our situation and risk tolerance.

As we read about this topic, we often find that 60% stocks/40% bonds has become almost a classic for a balanced portfolio. Do we really believe this to be the right allocation, or are we just  unwittingly using 60/40 more often than not?  Most importantly, it should reflect our unique needs and goals.

There are times when an investor will likely want to invest more or less aggressively. For example, a 100% stock portfolio may be great when you are 35, with a very long runway until retirement to absorb market fluctuations. It’s not always so wise when you need to tap your investments for living expenses in retirement.

The best retirement plans consider the answers to a host of differing questions:

  • Do you have health concerns?
  • Do you plan to retire completely or gradually reduce your work life?
  • How do you plan to use your time? Travel? Hobbies? For how long?
  • Are you depended upon for the needs of other family members? Caretaking responsibilities, or financial needs?
  • Do you know how much it will cost to maintain your desired standard of living? Will you really cut your costs, or will the costs of your post-retirement simply replace your current spending?
  • What is your best strategy for claiming Social Security benefits?

Your answers to these questions, as well as many others, should create a plan reflective of you and your needs.

Why is the 60/40 allocation so common? It’s a good balance when you need it.

The 60% often reflects the need for continued investment growth historically obtained from stocks. With life expectancy increasing, many people are planning a 30+ year retirement. In contrast, bonds traditionally provide relative stability and fixed income. In our current low interest rate environment, though,  the income aspect may become harder to achieve. As we age in retirement, the stocks/bonds ratio may move to 50/50 then to 40/60 and so on. It should be a process customized to your situation.

In the years leading up to your retirement, you should carefully consider your very personal answers to the questions above and plan accordingly. And don’t be surprised if it leads to a  60% stocks/40% bonds allocation along the way!

For disclosures, please click here.

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Thoughts in Charts: U.S. Currency

I took a trip to Europe after I graduated from college. My parents bought the plane ticket, and I was responsible for my “walking around” money. I wasn’t in the habit of following the currency market, so standing at the exchange counter it was pretty devastating to realize that my $500 was actually just going to be €367 Euros. Yikes! How was I going to afford gelato?

Our recent history has included a very strong dollar. This recent period of strength began toward the middle of 2014. During this time, it became less attractive to invest in foreign markets because these securities had significant currency losses when converted back to the U.S. Dollar.

While the current weakening dollar may mean that some poor college student is forced to eat gelato for lunch instead of a snack, it also means that international investment returns get a little tailwind.

I went and checked the rates around the time of my college trip. If I had stayed there for 6 months, worked some odd jobs and come back to the US with the same €367, they would have exchanged it for $540. That’s an 8% return.

I told my parents I should have stayed longer!

For disclosures, please click here.

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Thoughts in Charts: Keeping a Global Perspective

As US investors, it’s important to pay attention to how the international market is behaving. The panel on the left shows that US returns were stronger from 2005 to 2019, followed by EM, Europe ex-UK and then Japan.

Now let’s look at what happened when the pandemic first hit. The middle panel highlights the role international exposure could have played in your portfolio during the initial sharp market declines in the first quarter. Japan lost significantly less than the US. Emerging Markets, even with the purple drag of having to convert their returns to US dollars, lost about the same as the United States.

As the world emerged from the deep crisis, on the right-side panel, the United States is not the only place seeing the stock market recover significantly. International markets have enjoyed a significant tailwind from a weakening US dollar. Additionally, the earnings decline on the emerging market column is actually less than the United States. There are some very interesting things happening abroad that support staying globally diversified.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: A Non-401(k) Plan Week – A Fascinating Resource of Reports From McKinsey

McKinsey has recently published a fascinating and useful collection of reports Charting The Path To The Next Normal: A daily chart that helps explain a changing world – during the pandemic and beyond.  The page is full of charts linking to studies about how our world is evolving.

I found this one to be particularly well worth the read: Prioritizing Health: A Prescription For Prosperity. As you see below, the world’s life expectancy more than doubled in the 20th century and the population more than tripled.

The article posits that, in 2040, the world could see GDP 8% higher than it otherwise would be resulting from better health conditions driven by fewer early deaths, fewer health conditions, expanded participation and an increase in productivity (see chart below).  The results could be very good for markets especially as McKinsey estimates that “for each $1 invested in improving health, an economic return of $2 to $4 is possible.”

Good news for the future (and it couldn’t have come at a better time)!

For disclosures, please click here.

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Diversification – What Happened?

We’ve heard it time and again – “Don’t keep all your eggs in one basket.”  This childhood lesson finds its way into most investment portfolios, with diversification being an important and well-accepted principle in developing a long-term strategy with the opportunity for steady growth.

Knowing the benefits, it is all the more painful to see a situation in which diversification creates a moment-in-time significant underperformance.  So far in 2020, the single asset class of U.S. large growth companies, specifically led by technology stocks, are producing outsized returns compared to every other asset class – and by a long shot.

As an example, year-to-date returns through August 7th for the largest 1000 U.S. companies  (Russell 1000) are +21% for growth companies and -11% for value companies.  Take a moment to think about that that difference.  Indexes of smaller U.S. companies, emerging markets, and developed countries ex U.S, were also all significantly lagging large U.S. growth companies. When we hear of the rebound of the stock market, we should remember that much of that rebound is generated by a handful of well known large technology stocks.

We have all seen the dominance of some technology stocks over the recent past and for good reason.  The value creation of technology is undeniable.  But in reviewing the returns of each of the most recent ten years, there is nothing comparable to the 2020 year-to-date outsized returns generated by large growth companies vs. every other asset class of stocks.

This brings us to a few observations:

  • We are in a unique moment. The global pandemic has dramatically dampened the earnings and the returns of most industries around the world. Technology companies have so far been less susceptible to the negative earnings disruptions caused by the virus.
  • We cannot predict which asset class will produce the best returns in any year. One look at the relative ranking of various asset classes, year to year for a 20 year period, tells us clearly that there has been no consistency or pattern to which asset class was the outperformer in any year.  That includes the past 5 years in which the technology stocks have become increasingly popular.  The chart at the top of this post supports this point.
  • Every day is one day closer to a vaccine. At that point, it is reasonable to assume that businesses may accelerate their recovery and/or adjust to the world post-Covid.  Headwinds from Covid should recede, bringing the return of positive dynamics of diversification.

Diversification remains important for a successful long-term investment strategy. Don’t let this current market lead you to believe otherwise.

For disclosures, please click here.

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Thoughts in Charts: The Curve May Change the Strategy

I was talking with a mentor late last year, and she was telling me about this incredibly “reasonable” request from a client. He was asking for a very low risk 2% annual income from an investment that he was happy to hold for the next 15 years. I believe she said something like “I’ll take that request all day”.

This week’s chart illustrates why she felt very confident that she could deliver for this client.  She could go out the maturity ladder to around 10 years and buy US Treasury Note at the appropriate yield. She would get him a 2% annual payment with very low risk.

Had that client asked for a low risk 2% yield at the beginning of 2019, she would have had even less trouble designing a portfolio. In fact, if he had wanted to take periodic withdrawals, she could have built the portfolio with maturities that would accommodate shorter term cash flows without dipping below the 2% yield.

Even in December of 2008 when rates dropped during the Financial Crisis, she could have met his request. Short-term yield very nearly matched what it does today, but she still had options at the longer maturity dates to reach the desired 2% yield.

And then there’s today: his portfolio construction would be much more complex. No matter how far out she looks on the curve, US Treasuries are not offering a 2% annual income. To construct something now, she would be forced to ask the client to take on more risk or lower his annual income expectation to around 0.50%.

Just like my mentor, bond fund managers cannot go out and grab a low risk yield right now. At ThirtyNorth, we are staying vigilant – aware that managers may be digging into higher risk or asking us to accept lower returns. Those adjustments are likely market realities, but we want to be prepared to adjust your allocations in response.