Bob's Blasts

September, 2020

Markets

The S&P 500 has once again made a new all-time high! 

Not something many expected to say so quickly.  After declining over 30% in March, the S&P 500 has now recovered all of its losses in less than six months. Past bear markets have taken on average 4 - 5 years to recover losses.

As pointed out in the previous blast, the new all-time high doesn’t reflect most stocks or the overall economy.  The top five companies in the S&P 500 now make up close to 25% of the index and have been responsible for most of the returns this year. If you were to own an equally weighted basket of all the stocks in the S&P 500, you would actually be down for the year.  Small-cap stocks, as represented by the Russell 2000, and international stocks, as represented by the EAFE index, are both down for the year. 

While it feels much better to be talking about an S&P 500 at an all-time high rather than being down double digits, we wanted to point out the disparity that remains due to the high concentration at the top of the index.  As you look at your monthly statements, realize that you do have some exposure to these top performing stocks, but our diversified approach means you also have exposure to some areas that may not be doing quite as well.     

 

Election

We continue to get questions regarding the upcoming election and how we think markets will react.  We understand the concern but don’t know who will win and what the markets will do as a result.  Looking back at 2016, the overwhelming consensus was Hillary Clinton was going to win and look out below for the markets if Donald Trump won.  While this may have made a lot of sense at the time, it was the exact opposite result on both fronts.   

Now we are hearing a similar tone but in relation to a Biden win.  If Biden does win, there is a chance taxes may go up which typically isn’t market friendly.  The same was said when President Obama was elected and planned to let the Bush tax cuts expire.  Markets were expected to plummet once taxes went back up which never materialized.

With any election, there are always winners and losers.  Some companies will benefit and some will be hurt.  At the end of the day, corporate earnings will drive long-term market returns.  Rather than thinking about who will win the election and how it might impact the short-term performance of equities ask yourself a different question.

What is happening in my life now and in the next 6 months and am I financially prepared for these events?  This is much more important than trying to predict how markets may or may not react to the election or any single event.  If you find that you aren’t financially prepared for an upcoming event or life transition, please reach out so we can help ensure that you are. 

 

Moving forward

It can be difficult to focus on the long term when seeing markets drop 30% in a matter of weeks and media headlines focusing on all that is wrong with the world.  A recent article in The Wall Street Journal about Warren Buffet provided a few interesting facts:

  • Warren Buffet, who recently turned 90, accrued nearly 90% of his net worth after the age of 65. His highest returns were generated decades ago, but the long-term compounding effect has caused the massive dollar amount increase toward the back end of his investing career.   
  • $1,000 earning 10% annually, would be worth $1,600 in 5 years, 10 years of 10% growth would turn into nearly $2,600, in 25 years it would be worth more than $10,800, and in 50 years it would compound to almost $117,400.
  • If the Dow Jones Industrial Average (currently trading around 28,500) were to compound at 1.6% annually, the value would be around 100,000 on December 31, 2099.   At a 4.5% rate of return annually, it would bring the index close to 1,000,000 by the end of the century.  At a 7.7% rate of return annually, still below its 8.4% average over the past 30 years, would push the Dow past 10,000,000 by December 31, 2099. 

While not all of your money is invested with this kind of timeframe in mind, hopefully it helps illustrate the value of time in the market over trying to time the market. Investing well is important, but investing well for a long time matters even more.   Many of you are retired or approaching retirement and worry about having enough to last your lifetime.  These short term moves in the market are painful, but they have always passed.  Your timeframe may not be until the end of the century, but if you are close to retirement, there is a good chance your money may need to last 20, 30 or even 40 years.

Try to look past what is happening now as it relates to the markets impact on your portfolio in the short run and focus on what is happening in your life that impacts what you need from your assets. Always maintain sufficient liquidity for the next 3-5 years of income needs and let the remainder grow at a risk level with which you are comfortable. 

 

This material is meant for general illustration and/or informational purposes only.  Views expressed in this newsletter may not reflect the views of Royal Alliance Associates, Inc.  It is our goal to help investors by identifying changing market conditions.  However, investors should be aware that no financial advisor can accurately predict all of the changes that may occur in the market.   This material should not be relied upon as investment advice.  Investors should note that there are risks inherent in all investments, such as fluctuations in investment principal.  Past performance is no guarantee of future results.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. This article contains forward looking statements and projections.  Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice.