with Gene Fama, PhD, Economist, and 2013 Nobel Prize Winner

In this short video, Nobel laureate Eugene Fama provides perspective for long-term investors on why they shouldn’t pay a lot of attention to short-term results.

We at Cornerstone hope you found this video helpful. Please call us with any questions you may have on this or any other financial planning matters.

Also, we invite you to forward this message to friends, family, and colleagues who have expressed concerns about short term volatility. And its potential impact on their long-term financial well-being. Creating an opportunity for success starts with the ability to make good choices when times are challenging. During stressful times, this is easier said than done. We are happy to extend to them our thoughts, clarity, and financial coaching. After all, there is no need for people you care about to walk through times like this alone.

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with Gene Fama, PhD, Economist, and 2013 Nobel Prize Winner

The Nobel laureate explains why long-term investors should know the reasons they’re investing, understand risk, and not focus on short-term ups and downs.

We at Cornerstone hope you found this video helpful. Please call us with any questions you may have on this or any other financial planning matters.

Also, we invite you to forward this message to friends, family, and colleagues who have expressed concerns about short term volatility. And its potential impact on their long-term financial well-being. Creating an opportunity for success starts with the ability to make good choices when times are challenging. During stressful times, this is easier said than done. We are happy to extend to them our thoughts, clarity, and financial coaching. After all, there is no need for people you care about to walk through times like this alone.

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Creating a portfolio you are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may lead to a better investment experience. A financial advisor can provide the expertise and encouragement to keep clients focused on the destination.

We at Cornerstone hope you found this video helpful. Please call us with any questions you may have on this or any other financial planning matters. Also, we invite you to forward this message to friends, family, and colleagues who have expressed concerns about short term volatility. And its potential impact on their long-term financial well-being. Creating an opportunity for success starts with the ability to make good choices when times are challenging. During stressful times, this is easier said than done. We are happy to extend to them our thoughts, clarity, and financial coaching. After all, there is no need for people you care about to walk through times like this alone.

Tuning Out the Noise Download

These are challenging times, and this week may be the toughest as we wait for COVID-19 to reach its peak in the United States. As the war against COVID-19 wages on, we continue to be inspired by the tremendous bravery shown by healthcare workers on the front lines. Other heroes will likely emerge from a lab somewhere with a vaccine in the near future. In the meantime, we have important roles to play by maintaining quarantines and social distancing.

We anxiously wait for the day when this threat has passed, as life feels very different. Many of the things we enjoy most are not available right now, such as traveling, sporting events, shows, concerts, or just dinner out with family and friends. We’re video conferencing with our co-workers while children are going to school online, and we’re finding new ways to stay connected and entertain ourselves without leaving our homes. As a society, we’re finding forced isolation can be challenging.

As we adapt to these changes in our daily lives, the stock markets have had to adapt to the new economic realities as well. The longest economic expansion in our nation’s history has ended as the US economy has entered a recession. This economic contraction is quite unique—it’s the first one brought on mainly by governments, as they closed non-essential businesses and initiated social distancing restrictions to limit the spread of the virus. It also may prove to be unique by potentially being one of the shortest recessions in history, depending on how quickly the virus can be contained.

What is not unique is the challenge for investors in navigating the bear market that’s accompanying this recession. Historically, the best time for many investors to buy stocks has been at the trough, or low point, of a recession, although the trough usually has been evident only in hindsight. Since 1970, bear market low points have occurred within an average of three weeks of the biggest increase in weekly jobless claims, something that we hope came last week. In previous recessions since WWII, stocks bottomed an average of about five months before the end of the recession, as stocks sensed improved upcoming economic data (source: FactSet). No one knows for sure when stocks will bottom this time, but looking at these data points suggests we may be getting close.

We’ve received some better news in the battle against COVID-19 over the past few days. China has contained its outbreak, and its economy is restarting. In Wuhan, the epicenter of the China outbreak, the lockdown is being lifted. In Italy, the epicenter of the European outbreak, a peak in new cases likely was reached last week, and the government is starting to plan for a restart of its economy. The epicenter of the US outbreak, New York, is starting to see a slowdown in new cases. This fight isn’t over, and we cannot fully discount another wave of new cases, but the other side of this crisis is coming into view. The stock market also has started to sense that we’re nearing an inflection point.

This is one of the greatest challenges we as Americans have faced, but some light is starting to glimmer in the dark tunnel. We don’t really have a playbook for this human crisis, though we are encouraged that the measures being taken are having the desired effects. The playbook for investing in bear markets and recessions is clearer. It suggests that we stay the course, consider selectively taking advantage of emerging opportunities where appropriate, and focus on long-term investing objectives.

Please stay healthy, and don’t hesitate to contact me if you have any questions or concerns.

Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of April 8, 2020.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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Scammers, fraudsters, and other criminals are taking advantage of rapidly changing data and facts associated with COVID-19, both in the workplace and in our homes. Government agencies, corporations, and news outlets continue to warn individuals to be mindful of increased fraudulent activities during these uncertain times.

These scams, which can be sent via email, text message, and social media claim to provide COVID-19 updates, sell products, ask for charitable donations, or reference government aid packages. These messages appear to be legitimate in nature but seek to fraudulently obtain personal information, financial gain, and create panic. Use these tips to identify and avoid scams:

  • Watch for emails claiming to be from the Centers for Disease Control and Prevention (CDC) or experts claiming to have inside information on the virus. There are currently no vaccines, potions, lozenges, or other prescriptions available online or in-store to treat or cure COVID-19.
  • Do your homework prior to donating to charities or crowdfunding sites. Confirm the validity of the organization as fraudsters are now advertising fake charities. Do not let anyone rush you into a donation, particularly those who ask for cash, gift cards, or wiring of funds.
  • Do not click on links or open attachments from sources you do not know. Cybercriminals are using the COVID-19 headline as a tactic to spread viruses and steal information. Do not provide personal information, payment information or sensitive workplace information via suspicious email addresses.
  • Be suspicious of urgent demands and emergency requests. The health and safety of you and your family is the top priority. Do not fall for scammers threatening fees or fines, cancelled deliveries, and health concerns in exchange for financial gain.
  • If it sounds too good to be true, it likely is. Many individuals have begun to receive robo-calls and social media requests for social security numbers, banking information, and gift cards. Scammers promise high paying work from home opportunities, free sanitation and cleaning, as well as COVID-19 protection in exchange for payment and sensitive information.
  • Be mindful of scammers using government aid packages for criminal gain. Lawmakers have announced plans to send Americans checks to assist with the financial burden of the virus, with details still in discussion. The government will not request payment, nor will anyone reach out requesting personally sensitive health or financial information in exchange for financial support.
  • Obtain your news from a trusted source. Be mindful of text message scams, social media polls and fraudulent email accounts sharing false information to create panic. Before acting on information, review its source and check a trusted news outlet to confirm its validity.

When in doubt, ask a coworker, family member, or friend for their opinion. Two sets of eyes are better than one. If you believe you have fallen victim of a scam, call your local police at their non-emergency number and consider reporting to the FBI’s IC3 Internet Crime Database.

If you have any questions or concerns during this, please do not hesitate to reach out.

We continue to wish everyone good health as we all work to get through this challenging time.

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The following article is courtesy of the Wall Street Journal

By Jason Zweig

March 13, 2020

With U.S. stocks down—at their worst—around 27% in 16 trading days, investors need to get out of the prognostication business. Nobody—not epidemiologists, not government officials, not economists and certainly not market strategists—can say how large an impact the coronavirus will end up having. The optimists might be wrong; so, might the pessimists.

Investing, now more than ever, is about controlling the controllable. You can’t control the markets. You can’t control the coronavirus. You can control your own behavior, although that requires making accurate, honest predictions about yourself.

Controlling the controllable doesn’t just mean shrugging off whatever is out of your power. It also means putting some calm and serious thought into what is within your power. Your future success may depend less on what markets do—and more on spending a few quiet minutes figuring out who you are as an investor.

Years ago, the psychologist Daniel Kahneman told me that one of the keys to investing is having what he called “a well-calibrated sense of your future regret.” By that, he meant that you need to be able to tell, in advance, how bad you will feel if your decisions turn out to be wrong. As he warned with that word “well-calibrated,” it isn’t as easy as it sounds.

Investors are full of false bravado. It’s a cinch to say you’ll buy more stocks if the market goes down 10%. It isn’t even that hard not just to say it but to do it—a few times. Buying the dips is almost fun when the market goes down a little bit every once in a while.

But when stocks go down 7% or more in a day twice in a single week, the person you thought you were last Friday isn’t the person you are this weekend. A week ago, you thought you were ready for whatever the market could throw at you. Now, you’d flinch if a toddler tossed a marshmallow at you.

Will you be able to keep buying all the way down if the market goes down another 25%—or more? Will you even be able to hold on? Can you stand watching every dollar you had in stocks turn into 50 cents or less?

On the other hand, what if the panic subsides and stocks resume their climb—after you impulsively moved to the safety of cash and bonds that generate almost no income? How badly will you kick yourself over getting out of the market because of fears that didn’t fully materialize?

At the most basic level, those are the two potential regrets most investors face: the risk of losing massive amounts of money if the epidemic worsens, versus the risk of missing out on what could be a robust rebound if the virus abates.

You can minimize one risk, but not both. As the poet W.H. Auden wrote in 1936, you can only take one path at a time:

“Clear, unscaleable, ahead

Rise the Mountains of Instead

From whose cold, cascading streams

None may drink except in dreams.”

Only by creating a circle of calm around yourself can you honestly evaluate which type of regret is likely to bother you more down the road.

First, if you were investing back in 2008-09, go back and look at your actual account activity—not your warm and fuzzy memories of it—to see what you did the last time markets were in meltdown.

If you bought or stood pat as the U.S. stock market dropped more than 55% between October 2007 and March 2009, you’re a good candidate to be able to weather this downdraft, too, without panicking.

However, if you’re in or near retirement now, then the need to protect your capital from further sudden erosion could make you more conservative than you were back then. So, consider that now, when you can—rather than later, when you will have to.

Also, regrets tend to be hotter and more painful when an outcome appears to be caused by your own actions rather than circumstances that seem beyond your control. Regret is also more intense when you take an action that is an unusual departure from your normal pattern.

So, taking small actions over time, rather than making a big drastic decision all at once, should help reduce your future regrets regardless of what the markets do from here.

If you feel you must sell stocks to calm yourself, do it gradually rather than in giant steps—ideally, by setting a new target level and then moving toward it over time in automatic fixed amounts or percentages that will take some emotion out of the decision.

Consider, also, that if you have tuition or another large bill coming due, you could pay with shares of stock or funds rather than cash. If you have shares that have fallen below your purchase price, you may be able to sell them to meet a large payment and then use up to $3,000 of the resulting loss to reduce your taxable income or to offset current or future gains. (Consult your accountant first!)

Conversely, if the market collapse makes you want to buy stocks, don’t do that impetuously either. Nibble in equal amounts over the course of weeks or months.

Above all, small steps are the best way to avoid big regrets.

I’m sure you’ve seen the headlines, but if not, you should know that the global stock markets are dropping as a result of fears about the spread of the coronavirus.  The statistics keep changing, but currently by far the most deaths (2,664) have been confined to China, with 15 reported in Iran, 11 in South Korea, 7 in Italy and four on a Diamond Princess cruise ship off the coast of Japan.

We have no idea how far or fast the disease will spread, and neither do the markets.

What is the best course of action today?  The first 3% drop in the U.S. stock markets was completely unexpected, and nobody could predict the second day’s fall.  The options now are:

Sell today, and then watch to see how the spread of the coronavirus plays out in the minds of day traders and quick-twitch “investors.”  The odds are that the markets will recover before the end of the epidemic, so you’ll eventually have to buy back at a higher price than you sold at—and look like a bit of a fool.

Wait until there is confirmation that we are, indeed, in a real bear market, sell at or near the bottom, and then see the markets rise past where you sold—and look like a bit of a fool.

Hold tight, ride out the downturn (however long or short it might be) and experience the next rise (whenever it comes) and breathe a sigh of relief that the markets were not down permanently for the first time in human history.  You’ll do some sweating along the way, but in the end you’ll look like a winner.

Market timing during times of market stress is psychologically appealing, but in the real world it is pretty much impossible to execute.  Not knowing when to get out (Yesterday?  Two days ago?) and especially not knowing when to get back in, mean that your odds of getting it right twice are about 25% or less—and remember that you already missed the first timing decision.

So in the real, rational world, you have two choices: ride it out, or contact our offices if you are feeling real mental distress over these two days of downturns.  It could mean that you need a permanent reduction in your portfolio’s risk profile before you make a mistake, out of panic, that could cripple your financial future.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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A lot of “smart” investors will tell you that you should never invest when the market has been moving up, but instead should wait until there’s a pullback in order to buy at a bargain price.  But is that really a good strategy?

The biggest problem with this strategy is that you never know when the market will bottom out and start rising again.  But what if you actually did?  Would this strategy lead to incredible returns?

In a recent blog post, market analyst Nick Maggiulli decided to compare dollar-cost averaging against this perfect foresight of waiting to buy in until the markets hit a recent low, right before they started the next rise.  He found that if you randomly picked any trading day for the Dow Jones Industrial Average since 1970, there was a 95% chance that the market would close lower on some other trading day in the future.  That would be the time to buy, right?

Looking back, he found that just one in 20 trading days closes at a price that will never be seen again.  Between those days, our astute investor would hoard the cash that would otherwise be invested, and put it all in at the low point.  Maggiulli found that his hypothetical “buy at market lows” strategy would outperform a simple strategy of investing the same amount every day in the market by (get ready for this) 0.4% a year.

And remember, this strategy requires you to have perfect foresight—which, to be clear, none of us have.  In the real world, you are 95% likely not to get the best possible price when you buy into the market.  There’s no alternative but to accept this.

Even so, this is actually good news.  It means you don’t need a crystal ball to get pretty much the same returns that you would have gotten had the crystal ball somehow given you a view of the future.  All you have to do is continue to invest in a disciplined manner from now until you need the cash (in retirement?), and if the past is any indication, the market itself will take you where you want to go.

Source:

When was the last time you looked at the content of your portfolio?

From time to time, it is a good idea to review how your portfolio assets are allocated – how they are divided among asset classes.

At the inception of your investment strategy, your target asset allocations reflect your tolerance for risk. Over time, though, your portfolio may need adjustments to maintain those target allocations.

Since the financial markets are dynamic, the different investments in your portfolio will gain or lose value as different asset classes have good or bad years. When stocks outperform more conservative asset classes, the portion of your portfolio invested in equities grows more than the other portions.

To put it another way, the passage of time and the performance of the markets may subtly and slowly imbalance your portfolio.

If too large a percentage of your portfolio is held in stocks or equity investments, you may shoulder more investment risk than you want. To address that risk, your portfolio holdings can be realigned to respect the original (target) asset allocations. 

A balanced portfolio is important. It would not be if one investment class always outperformed another – but in the ever-changing financial markets, there is no “always.” In certain market climates, investments with little or no correlation (a statistical measure of how two securities move in relation to each other) to the stock market become appealing. Some investors choose to maintain a significant cash position at all times, no matter how stocks fare.

Downside risk – the possibility of investments losing value – can particularly sting investors who are overly invested in momentum/expensive stocks. Historically, the average price/earnings ratio of the S&P 500 has been around 14. A stock with a dramatically higher P/E ratio may be particularly susceptible to downside risk.1 *

Underdiversification risk can also prove to be an Achilles heel. As a hypothetical example of this, say a retiree or pre-retiree invests too heavily in seven or eight stocks. If shares of even one of these firms plummet, that investor’s portfolio may be greatly impacted.1

Are you retired or retiring soon? If so, this is all the more reason to review and possibly adjust the investment mix in your portfolio. Consistent income and the growth of your invested assets will likely be among your priorities, and therein lies the appeal of a balanced investment approach, with the twin goals of managing risk and encouraging an adequate return.

*The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and Asset Allocation do not protect against market risk. Stock investing includes risk, including loss of principal.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – thebalance.com/normal-pe-ratio-stocks-2388545 [2/27/19]

The article below include comments from thought-leader Bob Veres on the question we get occasionally on interest rates, the “inverted yield curve,” and the potential performance of bonds. Please reach out to us if you have any questions.

Rich Arzaga, CFP®

There’s almost zero chance that you missed the alarmist headlines on Friday about the inverted yield curve, which (you probably also read) inevitably signals an upcoming economic recession.  So the smart move is to retreat to the sidelines until the economic bust is over, and get back into the market once the yield curve has developed a healthy steepness.  Right?

Investors certainly thought so.  The S&P 500, on Friday, dropped 1.9%, as people reacted as if a recession would happen on Monday.

It would be nice if investing were that simple.  But in the current case, it is much further from simple than normal.

Why?

The yield curve is a line plotting out the interest rate (yield) that is paid to investors across maturities, from three month to 30 year.  An inversion happens whenever the shorter maturity bonds provide higher yields than longer-term ones—which is counterintuitive since the risks of holding bonds longer-term are greater than if you’re parking your money for a few months.  Longer-term, you could experience inflation, default or a rise in interest rates that will make you look stupid for committing your money at a particular rate for 10 years or longer.

This current so-called “yield curve inversion” really looks more like a flat line stretching from short-term to intermediate-term bonds.  What was widely reported was a (probably brief) moment when the 3-month Treasury note offered higher interest than the 10-year bond—by (get ready to be shocked) 0.022%.  You could see roughly the same spread difference around the beginning of 2006, which was not a very clear signal and did not result in a recession until a year and a half later.  Some months afterwards, the yield curve inverted with a vengeance, although it righted itself before worst carnage of 2008.

The lesson here is that, yes, we have experienced a yield curve inversion sometime before each of the last seven recessions.  However, there have also been two false positives—an inversion in late 1966 that was followed by economic growth, and a largely flat curve, like the one we are experiencing now, in late 1998 that also didn’t presage a recession.

Moreover, even if we accept the idea that a yield curve is a recession signal, the actual timing is almost impossible to predict.  Data from Bianco Research has shown that over the last 50 years, a recession followed, on average, 311 days later—roughly a year.  This is an average of some pretty broad fluctuations.  Following that brief inversion in 2006, the economy didn’t experience recession for another 487 days.  An inversion in December of 1978 was followed by a recession—389 days later.  In contrast, it took just 213 days for the U.S. economy to enter recession territory after a July, 2000 yield curve inversion.  Based on this evidence, selling the day after an inversion seems like a poor strategy.  Selling a month, or six months after doesn’t make sense either.

Finally, some economists think that the yield curve is not nearly the accurate signal that it once was.  The reasons are a bit technical, but they have to do with the increasing control that the central banks—including the U.S. Fed—have on the shorter end of the yield curve.  The Fed and other central banks have been buying up government bonds for their balance sheet, which means the shorter-term yields can no longer be seen as market driven.

So what IS an accurate signal of upcoming recession?  There are some tried-and-true signs, including an overheating rate of GDP growth (which we haven’t seen at all in this long, slow recovery), rising unemployment (nope) and spiking interest rates (no sign yet).  Another sign that directly impacts the yield curve is a sudden demand for longer-term bonds as a safe haven for nervous investors, causing the bond rates to drop below shorter-term paper.  There has been no indication of a shift in demand for bonds over stocks.

So what does all that mean?  The simple lesson is: don’t fall for clickbait.  We are still as much in the dark about what the economy and markets will do in the future as we were before 3-month Treasury bills returned a shocking 0.022% more than 10-year Treasury bonds.  We might experience a recession this year, or next, or in 2022.  All we know for sure is that we WILL experience one, possibly with a few unexpected market ups and downs in the meantime.

Sources:

https://www.marketwatch.com/story/the-yield-curve-inverted-here-are-5-things-investors-need-to-know-2019-03-22

https://seekingalpha.com/article/4250705-inverted-yield-curve-another-viewpoint

https://www.marketwatch.com/story/sp-500-could-fall-40-as-yield-curve-inverts-says-analyst-of-one-of-2018s-best-hedge-fund-returns-2019-03-22

https://www.forbes.com/sites/simonmoore/2019/03/23/the-yield-curve-just-inverted-putting-the-chance-of-a-recession-at-30/#2f7232bb13ab

https://www.cnbc.com/2019/02/20/a-recession-indicator-with-a-perfect-track-record-over-70-years-is-close-to-being-triggered.html