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Bill's Blog

An Exponential Ride

I've got to admit it's getting better
A little better all the time
I have to admit it's getting better
It's getting better since you've been mine
Getting so much better all the time

– Getting Better, Paul McCartney and John Lennon, 1967, “Sgt. Pepper’s Lonely Hearts Club Band” album

The last year brought exponential growth in – among other things – use of the word “exponential.”  It is now the go-to term when you want to say something is “growing super-fast.”

As humans, we tend to think in terms of linear growth – whatever is happening immediately around us in shorter time periods.  Accelerating, exponential growth is harder to grasp.  Exponential growth means the rate of growth increases with time, just like a car goes faster the more you press the gas pedal.

“Exponential” has become popular recently to describe the way a virus spreads, if nothing stops it.  When one person infects two others, each of whom infects two others, who each infect two others and so on, the numbers can quickly get out of hand.  Exponentially so.

But exponential growth isn’t always scary.  Compound interest is exponential and we all enjoy it (when we’re the lender, at least).  Moore’s Law, which says the number of transistors on integrated circuits doubles approximately every two years, is another example of extremely useful exponential growth.

The number of transistors on a microchip “only” doubles every two years. But that took it from 1,000 transistors to 50 billion in 50 years. Literally, 50 million times more powerful.

But it’s even better. If you go back to the late 1940s when transistors were first being developed, having 1,000 transistors on something called a microchip was barely a dream.  But with time and literally tens of thousands of patents and innovations, etc., we got to 50 billion.  People have been proclaiming the end of Moore’s law for decades.  I’ll take the other side of that bet and we are just exploring the edges of quantum computing.

Read a little about the chip industry’s growth and you’ll see words like “surprise” and “accidental” discoveries.  You’ll also see that it didn’t happen in one place at one time but was literally exploding all over.

But the exponential growth of the microchip would not have been possible without the exponential growth of all sorts of technologies and innovations developed over the previous 100 years. That’s the amazing thing about innovation.  Or, more broadly, we could just call it “progress.”

Humanity is constantly learning and improving.  These improvements build on themselves in an exponential process.  That’s why daily life changed far more in the last 200 years than it did in the prior 20,000 years.  The rate of growth accelerated.  And that’s why we will see more change in the next 20 years than we have seen in the last 200.  Yes, THAT is exponential.

Today we enjoy living standards far higher than even royalty did not so long ago.  Yes, we have problems, serious ones, but we also have advantages.  We know we can make the world better because it is getting better.  And it’s getting better all the time, at least over time.

This month’s blog is dedicated to highlighting good news – positive things that are happening all around us, often unnoticed or unappreciated.  I’ll get back to the problems of the day later, but today I want us to appreciate the positive.  There’s a lot of it out there.  And any serious investor should pay attention because technological innovation is where the real financial upside is (along with, admittedly, a lot of dead-end alleys).

Pandemic Pluses

This year’s top good news, by far, is the COVID-19 vaccines. It was a mind-boggling scientific, manufacturing, and distribution achievement. To have a vaccine at all is amazing; to have several of them only a year after the virus was identified is unprecedented.  This kind of work once took decades.  Operation Warp Speed was indeed a triumph of human work, cooperation between the private and public sectors, effort, and ingenuity.

This happened in part because scientists had been working on the underlying methods and technologies for a long time, not knowing they would be useful in a pandemic.  You can read the whole gripping story in The Atlantic by Derek Thompson.

Briefly, “messenger RNA” (ribonucleic acid) is a genetic substance that tells your cells which proteins to make.  Researchers in various places realized long ago that manipulating RNA could be quite useful, but exactly how to do it was elusive.

It turns out that Hungarian scientist Katalin Karikó discovered mRNA back in 1978.  She eventually ended up at the premier epidemiological university in the United States, the University of Pennsylvania, where she worked on her discovery with other scientists. Eventually in 2000 they began to see some success.

Private companies began working on mRNA products, with Moderna in the US and BioNTech in Germany eventually cracking the code.  US pharmaceutical giant Pfizer had made a deal with BioNTech in 2018 to develop an mRNA flu vaccine.  When SARS-CoV-2 struck, they pivoted quickly.  The result went into my arm a month ago and again this week (and I hope yours as well).  The technology they developed may well lead to other life-saving medicines, like a malaria vaccine (with a variation of mRNA technology) and individually tailored cancer treatments.

I want to focus a little bit on how incredibly successful the actual vaccine is, and to highlight some of the misinterpretations of statistics by the public.  I’ve been participating in a multi-part education program for financial advisors that focuses on the massive amounts of research on COVID that comes out weekly.  This crossed my desk this week:

So, with a 50% effective vaccine, we have a 50% chance of contracting COVID-19, and with a 95% effective vaccine, we have a 5% chance… right?

Actually, the news is much better. Consider what that “95% effective” statistic actually means.  As The New York Times' Katie Thomas explained, the Pfizer/BioNTech clinical trial engaged nearly 44,000 people, half of whom received its vaccine, and half a placebo.  The results? “Out of 170 cases of COVID-19, 162 were in the placebo group, and eight were in the vaccine group.”  So, there was a 162 to 8 (95% to 5%) ratio by which those contracting the virus were unvaccinated (albeit with the infected numbers surely rising in the post-study months).  Therein lies the “95% effective” news we’ve all read about.

So, if you receive the Pfizer or equally effective Moderna vaccine, do you have a 5% chance of catching the virus?  No. That chance is far, far smaller: Of those vaccinated in the Pfizer trial, only 8 of nearly 22,000 people, less than 1/10th of one percent (not 5%), were found to have contracted the virus during the study period.  And of the 32,000 people who received either the Moderna or Pfizer vaccine, how many experienced severe symptoms?  The grand total, noted David Leonhardt in a follow-up New York Times report: one.

German Scientist Gerd Gigerenzer says that his nation suffers from the same underappreciation of vaccine efficacy.  “I have pointed this misinterpretation out in the German media,” he notes, “and gotten quite a few letters from directors of clinics who did not even seem to understand what’s wrong.”  “Be assured that YOU ARE SAFE after vaccine from what matters—disease and spreading,” tweeted Dr. Monica Gandhi of the University of California, San Francisco.

Of 74,000+ participants in one of the five vaccine trials, the number of vaccinated people who then died of COVID was zero. The number hospitalized with COVID was also zero:

 

This is simply mind-boggling, in terms of not just the speed at which the vaccines were developed but also their efficacy. But just like the 442,000 Teraflop per second computer (the world’s fastest computer now in Japan), the successful vaccine would not have been possible without the multiple decades of work developing it, let alone the even longer period of research prior to the discovery of mRNA.  Moderna literally had a working vaccine model within 48 hours after learning the DNA sequence.  Six weeks later, it shipped its first vaccine batches to laboratories in Maryland to begin human trials.  The summary from The Atlantic article mentioned above:

“The triumph of mRNA, from backwater research to breakthrough technology, is not a hero’s journey, but a heroes’ journey.  Without Katalin Karikó’s grueling efforts to make mRNA technology work [in 1978], the world would have no Moderna or BioNTech.  Without government funding and philanthropy, both companies might have gone bankrupt before their 2020 vaccines (Reagan was wrong on this one…sometimes it takes government to do things that private industry alone cannot).  Without the failures in HIV-vaccine research forcing scientists to trailblaze in strange new fields, we might still be in the dark about how to make the technology work.  Without an international team of scientists unlocking the secrets of the coronavirus’s spike protein several years ago, we might not have known enough about this pathogen to design a vaccine to defeat it last year.  mRNA technology was born of many seeds.”

The vaccines may be what gets us out of the pandemic, but the experience drove some other unintentional innovation, too.  One was remarkably simple: Remote doctor visits.  Many medical issues can be handled with a simple conversation, but (at least in the US) it rarely happened for legal, liability, and insurance reasons.  The pandemic compelled all the players to cut through those barriers.  I don’t think we will be going back.

This also illustrates the exponential growth principle.  Now that remote medicine is allowed and people (both providers and patients) are getting comfortable with it, we will expand the range of services delivered that way.  Technology will be the key – or rather, a bunch of technologies working together. Virtual reality cameras and visors, 5G bandwidth, haptic sensors to convey “touch” without being there – all will speed up the process and should lead to better outcomes.

But even as the pandemic unfolded, other innovation continued. Let’s look at some more examples.

Food Future

The last year also gave many of us a new relationship with our food. With restaurants closed or limited, we did more of our own cooking.

In fact, our food habits and methods are always changing.  Many plants we eat simply didn’t exist in their current form even a century ago.  They have been cross-bred and manipulated into what we know now.  That process is continuing as several companies now offer plant-based meat substitutes.  As often happens with new technologies, prices are falling and people are finding new uses for the products.

Material Factors

Some of the most amazing breakthroughs are also the most basic: the materials we use to build everything else.  Hydrogen, for instance, is the most abundant element in the universe yet we have long struggled to isolate and make use of it.  This is changing.

The current process for producing hydrogen consumes a lot of energy itself, and also emits large amounts of greenhouse gases.  Another method called electrolysis is simpler and cleaner.  All you need is water and electricity.  The electricity can come from renewable sources.  That means hydrogen can (in theory) be produced almost anywhere, reducing the need to haul fossil fuels around the world.

Beyond hydrogen, other materials science breakthroughs are brewing everywhere.  Graphene, which is basically a sheet of carbon just one atom thick, nearly weightless but 200 times stronger than steel.  Scientists refer to it as a “super-material” for obvious reasons.  The applications are endless.

There are also major breakthroughs in nanotechnology – manipulating matter at super-microscopic levels.  This is a bit unbelievable so I’m going to list but a few:

Progress has been surprisingly swift in the nano-world, with a bevy of nano-products now on the market.

Never want to fold clothes again?  Nanoscale additives to fabrics help them resist wrinkling and staining.

Don’t do windows?  Not a problem!  Nano-films make windows self-cleaning, anti-reflective, and capable of conducting electricity.

Want to add solar to your house?  We’ve got nano-coatings that capture the sun’s energy.

Nanomaterials make lighter automobiles, airplanes, baseball bats, helmets, bicycles, luggage, power tools—the list goes on.

Researchers at Harvard built a nanoscale 3D printer capable of producing miniature batteries less than one millimeter wide.

And if you don’t like those bulky VR goggles, researchers are now using nanotech to create smart contact lenses with a resolution six times greater than that of today’s smartphones.

And even more is coming.  Right now, in medicine, drug delivery nanobots are proving especially useful in fighting cancer.  Computing is a stranger story, as a bioengineer at Harvard recently stored 700 terabytes of data in a single gram of DNA.

The applications are endless.  And coming fast.  Over the next decade, the impact of the very, very small is about to get very, very large.

Again, all this is coming now.  And as I described above, the real impact is exponential.  Using nanotechnology to solve these problems will free up the productivity currently being applied to them, so it can be multiplicatively used for something else.  What would that be?  Probably things we can’t presently imagine.

While we are approaching the limits of lithium-ion batteries, there are literally scores of new technologies being developed which will far surpass current technology.  The ultimate green energy, fusion energy, is fast becoming more than a pipe dream.  There is a revolution in agricultural production that will completely disrupt current production cycles over the next 20 years.  A little slower than Moore’s Law, but just as powerful.

You may have missed that last year Brown University scientists began wirelessly connecting the human brain in quadriplegics. An electrode array is attached to the brain’s motor cortex and then high-speed networks allow the patient to communicate.  We are not all that far from the day when, if you choose, you will be able to “talk” directly to your computer simply by thinking.

Entrepreneurial Shifts

Our most important natural resource, by far, is the human mind. Any one of them has astonishing potential all by itself.  When we put them together, true magic happens.

As you know, this pandemic/recession has destroyed hundreds of thousands of small businesses all over the world.  But it didn’t destroy the entrepreneurs who founded them.  I believe many will do what comes naturally to them and start more businesses – hopefully better than those they lost.

Transitions are hard but often lead to a better place. I believe some wonderful new ideas – and very successful businesses – will emerge from this time.  I can’t wait to see what they are.

We literally live in one of the most exciting periods in all of human history.  Oh, did I not mention the possibility that we might live a great deal longer than previous generations?  Of course, that’s a financial planner’s nightmare since we design retirement spending scenarios designed to last at most 30 years.  Maybe in the next positive letter…

Exponential and Your Investment Portfolio

What are we doing with your investment portfolio to ride this wave of exponential progress into the future?  Step one was the introduction of an entirely new asset class which I have labeled “Innovation”.  In this category we focus on companies leading the exponential wave into the future. Investments in this category include (among others) …

·       SPDR Kensho New Economies ETF (symbol KOMP) constructed around themes such as autonomous vehicles, 3D printing, genetic engineering and nanotechnology.

·       iShares Exponential Technologies ETF (symbol XT) big data and analytics, nanotechnology, medicine, networks, energy and environmental systems, robotics, 3-D printing, bioinformatics and new financial services technologies (fintech).

·       ALPS Disruptive Technologies ETF (symbol DTEC) 100 companies focused on 10 themes including healthcare innovation, internet of things, clean energy & smart grid, cloud computing, data & analytics, fintech, robotics & AI, cybersecurity, 3D printing, and mobile payments – all with a focus on disruptive technologies and innovation.

·       ARK Innovation ETF (symbol ARKK) specializing in bleeding edge companies in the areas of genomic revolution, industrial innovation, digital currencies and artificial intelligence)

Lastly, even outside the Innovation category, we focus on companies run by management teams that are progressive, forward-thinking and that embrace change.  This is particular evident in those areas of your investment portfolio dedicated to food, water and clean energy.  Even in the international emerging market category, we focus on consumer growth companies and “cash cows” benefiting from exponential growth in the internet, mobile computing, 5G, disruptive retail and innovative healthcare solutions.

The New Roaring 20’s

The original roaring 20’s was the ten-year period that followed the pandemic of 1917.  That too was marked by exponential growth in communications (the telephone and radio), the automobile, mass consumerism and social, artistic and cultural dynamism.  So far at least, the roaring 20’s of 2021 looks quite similar.

Jae and I are looking forward to being able to travel soon.  He gets his second Moderna vaccine in a few weeks.  We’ve also closed on our purchase of a co-op apartment on the western edge of New York City’s Central Park, which will be our permanent home away from home. 

I truly hope that we avoid a fourth wave (which coincidentally was the same number of waves experienced in the pandemic of 1917-1918) – and that more of the country and the world opens up soon.  But to do that we really need to encourage everyone to get their vaccinations.  Then we can relax these intrusive precautionary measures and people will get on with their lives, both personally and professionally.

That being said, we will probably face versions of COVID-19 for years.  New variants will develop in countries that have not been able to vaccinate and achieve herd immunity.  The doctors and scientists I follow fully expect that we will need periodic booster shots for a few years at least.  But I know of several companies that are also working on a “universal” vaccine.

Beyond vaccines, technologies are being developed that will constantly clean viruses and bacteria from our homes and gathering places, with no harm to human beings. Nano robots have been invented to clear our arteries of plaque.  Further innovations of that technology will be available before the end of the decade that I think will become ubiquitous.

Bill

 

Most of the credit for this month’s blog goes to the NY Times best-selling author and renowned financial geopolitical expert, John Mauldin for many of the thoughts, words and ideas included in this month’s blog. 

 

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It’s a Whole New World

So much has changed in our lives in 2020.  Everyone is feeling stressed.  Here are a few of today’s top stressors.  It’s not a complete list.  What are your top 5 stressors?  And what does it say about our current situation if you have difficulty limiting your list to just 5?

 

Pandemic

Sickness and death

Lockdowns

Job loss/Furloughs

 

Protests

Wild Fires

Hurricanes

Floods

 

Violence

Cabin fever

Socialism

Fascism

 

Systemic bias

Homelessness

Isolation

Food Insecurity

 

Depression

Sense of loss

Sickness

Fear of dying alone

 

QAnon

Political extremism

Quarantine

Conspiracy theories

 

Weight gain

Political protest

Racism

Unconscious bias

 

Nationalism

White Supremacy

Proud Boys

Police shootings

 

Hate speech

Extreme partisanship

Pizzagate

Hatred of elites

 

Hospitalization

No Funerals

Antifa

Climate Change

 

Election fraud

No Weddings

Masks

Mass Shootings

 

Fact checking

Fox News

Hannity

Rachel Maddow

 

Racial Justice

Institutional Norms

Deep State

Social Distancing

 

Fake News

Foreign Interference

Hate Speech

Disinformation

 

Loss of Civility

Media Bias

Propaganda

Intolerance

 

You’ll notice that “investment performance” is not on the list.  Developing and implementing your investment strategy is my job, not yours.  I’m good at it because I have the time and interest to consistently learn.  I’m constantly seeking out new ideas to minimize risk and maximize future returns.  Managing risk is my specialty.  Diversification, strategic thinking and careful research are my primary tools.

Covid-19 is disrupting societies, economies, and markets around the world like no other crisis since World War II.  Policymakers, health workers, business and investors have been caught flat-footed, and without a playbook.  Adoption of trends that were already well underway have accelerated at a breathtaking pace, and new trends have emerged.  Working from home, online grocery delivery, home fitness, online education, relocation from cities to suburbs, online shopping, restaurant delivery, e-sports and video games, and dozens of other new trends are now firmly in place and here to stay.  Change is always stressful, especially when the speed is breathtaking.  When it comes to your investment portfolio, you can relax and take a deep breath.

I’ve spent much of the past 6 months rethinking investment strategy to adapt to the new realities.  I’ve attended two week-long strategic investing conferences for investment professionals.  I’ve participated in dozens of daily webinars hosted by fund companies and industry leading educators.  Both of the strategic investment conferences (originally scheduled for Phoenix and for Sydney) were virtual online events this year.  I’ve heard from 60+ leading investment thinkers from around the world.  I’ve listened to podcasts and finished more than a dozen audible books online.  The voices included portfolio managers, CIOs, senior investment analysts, investment strategists, economists, independent consultants and practitioners. Each offers his/her best high conviction ideas on contemporary and emerging portfolio construction strategies, to help us build better quality investor portfolios in a whole new world.

Even as I continue my own education, I’ve been busy making strategic changes to our investment strategy and investment selections.  This was necessary as the rules have changed. 

First, it’s important to understand that you remain highly diversified across 20 different asset classes, each chosen for specific reasons.  That part has not changed.  The changes I’m referring to are occurring within each of the asset classes.  Each change will be highlighted in some depth below. 

My goal is always to minimize risk and volatility while achieving market-like returns over time.  Like pieces in a puzzle (or players on a sports team), each asset class plays a very specific role in portfolio construction.  Some benefit from inflation.  Some deflation.  Some from economic growth.  Some from economic slowdown.  Others from rising interest rates.  Others from falling rates.  I could go on.  When we put them together, the whole is greater than the sum of the parts.  And each part is absolutely necessary to fully maximize the benefits for the whole.

A robust, carefully constructed investment portfolio with routine tax-aware rebalancing protects us from the negative consequences of making reactive investment decisions.  It avoids adverse outcomes that typically result from undisciplined portfolio decisions and unpleasant surprises on your tax return.  But a thoughtful strategy and robust framework is not enough.  Investment processes must be flexible enough to shift with changing paradigms, to avoid introducing unintended risks into portfolios.  It helps to have a clearly articulated and defined investment philosophy and framework to overcome our human tendencies, and successfully navigate treacherous conditions such as those experienced in 2020.

For the past 50 years we’ve lived in a period of mostly declining interest rates.  Rates have fallen from more than 20% in the early 80’s to negative in some parts of the world today.  That represented a tailwind for stocks, bonds and real estate for most of those years.  Returns of 8% to 10% were common during much of our investing lifetimes.  A new reality has now set in.  Today rates have nowhere to go but up.  Valuations are stretched by historic standards.  Demographically most of the developed world is aging and exiting their most productive years.  Economic growth and the investment return that it generates are increasingly harder to come by.  Much of the growth we have seen in recent years can be directly attributed to Fed policies that effectively pull future returns forward.  As a consequence, Investment returns for diversified portfolios are likely to average no more than 4% to 5% per year over the next 5 to 10 years.  This is the consensus among most economists and Wall Street banks.  Northern Trust was the latest institution to lower their long-term return forecast to 4% just last week, joining JP Morgan, PIMCO, and others (see the “Ivy Portfolio Index” attached).

Meanwhile, central bank “money printing” to prop up the economy has added increased risks to the financial system including the fear of resurgent inflation or even a potential monetary collapse.  A global pandemic still has yet to run its course, potentially leaving a path of both physical and economic pain that has yet to be fully realized.

We are entering a period of great unknowns.  The greatest minds of our time are wise enough to know that we have never been here before and none of us can accurately predict where we’re going from here.  Depressed yet?  Don’t be.  A lot of good things are happening at the same time.

A bull case can be built on the fact that we’re entering a period of great technological innovation and dramatic increases in productivity.  Self-driving cars, 3-D printing, “internet of things”, wearable technology, cloud computing, genomic engineering, robotics and artificial intelligence are disrupting and revolutionizing our world. 

A bear case can be made that these disruptive technologies are resulting in rapid change that may be beyond our ability to cope – at least in the short term.  Just ask Alexa if you’d like to know more! 

While I am a long-term optimist, I place no short-term bets either way.  Your portfolio will help us prepare for all possible scenarios.  There will be winners and losers among your 20 asset classes.  That is by design.  You’re positioned for all possible scenarios.  No matter which scenario unfolds and at what pace, your portfolio is designed to produce market-like returns with as little drama as possible. 

Here’s a brief description of some of the changes that I’m begun making inside the 20-asset class structure of your investment portfolio.  Note that underlined names and phrases in blue are links to more information.  These changes will better position us for success in this new world:

Equities:  Broad-Based

US Large Cap Stocks: No doubt that you’ve heard that a handful of stocks now make up more than 25% of the market capitalization – Facebook, Apple, Amazon, Netflix, Google (FAANG).  In fact, the largest 50 of the 500 companies that make up the S&P 500 index now represent well over half of the S&P.  Even as these top 50 have become quite expensive, many of the 450 remaining offer compelling values.  I’m focusing on individual companies that produce high “free cash flow”.  These are solid companies that generate cash income beyond what is needed for reinvestment in the businesses.  Many of these companies pay solid and sustainable dividends, can add value by buying back stock, and have solid earnings growth prospects for the future.  These are the “Cash Cows” of the S&P.  The Pacer US Cash Cows 100 ETF (symbol COWZ) has been added to your investment portfolio along with some individual companies that I believe offer compelling value that fits this theme.

US Small Cap Companies:  Smaller companies tend to be more volatile than large companies, but as a group they have historically offered better investment returns over long periods of time.  The Pacer US Small Cap Cash Cows 100 ETF (symbol CALF) has been added to your portfolio along with some select smaller capitalization companies that offer strong free cash flow, compelling valuations and solid growth prospects.

Int’l Developed Market Companies:  International stocks are currently less expensive than their US counterparts.  This may reflect the higher weight of high-flying technology names in the US indices.  International companies also offer geographic diversification and currency diversification in an uncertain world.  The Pacer Developed Markets International Cash Cows 100 ETF (symbol ICOW) includes international companies with selected for their strong free cash flow and stable dividends.

Emerging Market Companies:  Emerging market stocks are a different animal, so to speak.  Here we want Cheetahs, now Cows.  Emerging market countries are where we were back in the 1950’s.  Here we look for fast growing companies that are best positioned to capitalize on the rapid population growth in the developing world.  The Emerging Markets Internet + eCommerce ETF (symbol EMQQ) and the Columbia Emerging Markets Consumer ETF (symbol ECON) avoid the problem of inefficient “state-owned enterprises” that dominate many broad-based emerging market funds.

Equities:  Natural Resources & Basic Needs

Energy & Materials Companies:  The fossil fuel industry is dying.  Rapid advances in technology and reduced costs are catapulting clean energy companies focused on solar, wind, geothermal and battery technologies into taking their place.  I’ve been exiting all broad-based energy companies relying on fossil fuels in favor of renewable energy ETFs and individual companies that are leading the charge (pun intended).

Food & Farmland Companies: The world’s population is growing – and through good times and bad –– we all have to eat.  I’m now supplementing the two industry ETF stalwarts, VanEck Vectors Agribusiness ETF (symbol MOO) and iShares MSCI Global Agriculture Producers ETF (VEGI) with companies like Farmland Partners which owns 158k acres of farmland and Gladstone Land which owns 88k acres.  I’m also supplementing the broad-based food and farmland ETFs with individual companies including leaders in the plant-based foods revolution such as Kroger, Beyond Meat and rapid growers like United Natural Foods.

Water & Environment Companies: Water is the new oil.  We all take it for granted.  And why not?  We turn a tap and out it comes.  But that’s about to change.  The basic problem is that the quantity of water in the world is finite, but demand everywhere is on the rise.  Water is considered an “axis resource”, meaning it’s the resource that underlies all others.  So, whether you’re building a computer chip, or growing crops, or generating power, all these things require lots of water.  We invest in ETFs like the Invesco S&P Global Water Index ETF, and individual industry-leading companies such as  Veolia , Xylem and Consolidated Water.

Timber Companies:  A unique characteristic of timber companies is that their inventory keeps appreciating in value even during recessions – as their trees continue to grow during good times and bad.  Lumber is also used primarily in the single-family home market, which is booming during the pandemic as people leave high-rise living in cities for work-at-home solutions in the suburbs.  We invest in both iShares Global Timber & Forestry ETF (symbol WOOD), and directly in Weyerhaeuser, the largest landowner in the United States with 12 million acres of timberland under management.

Fixed Income:

Cash & Currencies:  This is our dry powder.  There are times when cash is king even when the yield is next to nothing.  The US dollar has been on a long run versus other countries for more than 20 years.  With the current unprecedented pace of Fed money printing, some believe that that this trend is long in the tooth.  For that reason, and to hedge our bets, we are beginning to include foreign cash in the mix through currency ETFs.  Favorites include the Australian and Canada dollar (commodity currencies) and the Swiss Franc (which has a long history of responsible management of their currency).

US Bonds: Historically the least risky asset class may now be the riskiest of them all.  After 50 years of declining rates (which causes the prices of existing fixed-rate bonds to rise in value), many of us wonder how much lower they can go if at all.  Nonetheless, bonds remain an important diversifier.  We avoid the risk of rising rates by focusing on bonds with short duration, inflation-protected bonds, variable rate bonds, and bond substitutes like new products such as Cambria Tail Risk ETF (TAIL), which invests in a combination of US treasuries and “put options” on the stock market that would rise in value significantly in the event of a sizeable market downturn. 

International Developed Market Bonds:  Our focus here is on currency diversification to reduce the risk of decline in the US dollar and inflation-protection through TIPS purchased from major developed issued by responsible governments including Germany, Spain, the UK, Australia, China and Japan. 

Emerging Market Bonds:  Bonds issued by developing countries offer both currency diversification and high yield.  Today emerging market countries like South Korea, Indonesia, Malaysia, Taiwan and the Philippines often have stronger balance sheets and less debt than many of their developed market counterparts.  These countries have younger populations and better growth prospects than their more highly developed competitors.  In that sense the bonds of these countries may be mispriced, leaving room for significant appreciation in addition to their already high yields. 

Real Assets & Alternative Diversifiers

US Real Estate:  There is something to be said for physical assets that we can feel and touch, and which don’t become obsolete when someone invents new software code, a faster computer chip or better high-tech mousetrap.  Shopping malls and office buildings may be in secular decline, but apartment communities in low tax states, senior housing and datacenters in suburban markets are on the ascendency.  Income-producing real estate provides low risk and solid dividends as long as one doesn’t bet too heavily on particular types and locations.  We are now supplementing broad-based REITs with companies that own senior housing, medical offices, apartment communities in the Sunbelt, distribution warehouses and cloud-based datacenters that are in increasing demand all over the country.  REITs currently produce dividends of 4% to 5%.  Even assuming no appreciation in asset values, this asset class offers solid returns.  Given the tax structure of REITs, we typically hold real estate investments in tax-deferred retirement accounts whenever possible.   

Global Real Estate:  If real estate itself is a good diversifier, owning it globally magnifies the diversifying properties.  Cell towers, data storage facilities, and cloud-based data centers are exploding in demand worldwide.  We own US domiciled REITs that maintain real estate holdings worldwide.  Yields here are even higher than with US properties, averaging 6% to 7% globally. 

Global Infrastructure:  Highways, bridges, and airports make up the bulk of publicly-owned global listed infrastructure, but the fastest growth is coming from the rapid expansion of critical infrastructure that uses smart technologies. Years of dithering and missed opportunities in Washington have forced innovators and investors alike to create their own infrastructure boom. With the economy crying out for stimulus and an election on the horizon, these companies may finally be ready to rebuild the nation and the world.  Regardless of which party wins the US election, it’s a safe bet that we will be heavily investing in rebuilding our infrastructure beginning next year. Rebuilding infrastructure means new jobs and economic growth, which may be sorely needed as we come out of the pandemic and face dislocation in so many service industries.  We are getting ahead of this curve by investing in Global X US Infrastructure Development ETF (symbol PAVE) and SPDR S&P Kensho Intelligent Structures ETF (symbol SIMS).  The former invests in traditional companies that benefit from infrastructure development including railroads, engineering companies, heavy equipment makers and contractors.  The latter focuses on smart building infrastructure, smart grids, intelligent transportation infrastructure and intelligent water infrastructure.  This category could explode upward when Congress and the President get serious about rebuilding our infrastructure and stimulating the American economy in the process.

US Energy Infrastructure:  We’re gradually exiting the oil and gas pipelines that once dominated this category in favor of progressive utilities that have embraced new technologies including solar, wind, nuclear and other non-fossil fuel source of energy.  We remain partially invested in Kinder Morgan, an energy pipeline company that is expected to benefit from consolidation of the remaining US pipeline infrastructure as they gobble up weaker players.  It doesn’t hurt that Richard Kinder, one of the greatest minds in the energy industry, owns 10% of the shares.

Gold & Gold Miners:  The Federal Reserve can print money, but they can’t print gold.  Gold has historically performed well during deflationary periods when fear is high and when low interest rates make the carrying cost low.  Gold also performs well in inflationary periods when confidence in paper money is waning.  Our gold holdings are diversified in vaults throughout the world including London, New York, Frankfurt, Perth, Toronto and Zurich.  We also hold companies that own gold in the ground in the form of the gold miner ETF iShares MSCI Global Gold Miners ETF (symbol RING) and individual gold mining companies such as Newmont (symbol NEM).

Commodities:  Commodities are turning in a solid performance in 2020.  The category includes oil and gas, agricultural products, industrial metals, and precious metals including silver, platinum and palladium – many of which have industrial uses in technologies of the future.  Most importantly, commodities are a tangible real asset that outperforms when the US dollar is weak, as it was for most of 2020 to date.  Commodities are in finite quantity and extraction involves significant costs, offering a thesis for increased scarcity as population growth continues around the world. 

Innovation:  This is the most exciting category to talk about.  It’s all about the future, except that the future is now.  Innovation has persisted throughout the course of history; but it has not always progressed in a predictable or linear fashion.  Innovation is episodic.  Periods when we have seen increases in rapid adoption of new technologies typically coincide with sustained and accelerating economic growth.  I believe that we’re now living through a 4th industrial revolution and that is driving the current pace of innovation in the marketplace.  Building on the 3rd (a digital revolution occurring since the mid-20th century), the 4th reflects many technologies – blurring the lines between physical, digital and biological spheres.  Innovation is everywhere.  It can be found in any part of the economy regardless of sector classification, market capitalization or geographical location.  That’s why I’ve created a space for innovation as a separate asset class.  The companies that are leading this revolution don’t necessarily fit in any of the other 19 categories.  Some of them are small and not yet profitable.  They don’t always appear in other broad market indices.  There are 5 platforms of growth that will generate significant economic value over the next 5 to 10 years:

·        Global E-commerce.  Beyond companies like Amazon and Alibaba – who have penetrated industries like travel, books, household products, groceries, office supplies and media – I see significant opportunities in fashion, autos, travel, ride sharing, restaurant delivery and even textbooks.  There are opportunities in payment companies that are easy to use and add security and safety to the system.  Drone manufacturers and other ways to delivery packages are also potential areas for investment.

·        Genetic breakthroughs.  The genetics industry is on the cusp of creating meaningful advances in diagnostics and therapeutics, and even in areas like agriculture and artificial intelligence applications.  Human longevity and aging may even be manipulated through advances over the next 10 to 15 years.

·        Intelligent machines.  Artificial intelligence or machine learning is permeating every layer of product development. If the past 30 years we spent time collecting and organizing data with mainframes, personal computers and mobile phones.  The next 30 years could be set up to take that data and change our lives in the physical world.  The future of production will include individualized products designed to the needs of the customer.  Efficiencies in the design and manufacturing process, employing robotics, 3D printing, and manipulation of massive amounts of data, will enable that level of specificity and customization.

·        New finance.  Efficient pricing and methods of payment are advancing and being adopted rapidly.  Methods of exchange are evolving with trends in e-commerce, allowing mobile payments and digital wallets to gain traction. This is especially true in developing countries that lack the advantages (or burdens) of a brick-and-mortar banking infrastructure.  In many poor countries, payments by smart phones have already completely replaced paper currencies and the need for bank accounts or credit cards.  FinTech is a merging of finance and technology and rapid adoption is already underway everywhere in the world.

·        Exponential data.  Our ability to collect, store and deliver data to create more efficient marketing and distribution has taken a major leap forward in recent years and is growing exponentially.  That requires massive amounts of datacenters, fiber-optic cable, and cell towers.  Advances in artificial intelligence, computing power and memory are allowing us to fully exploit that data.  The creation, cleaning, storage, and delivery of data will lead to new applications like augmented and virtual reality, artificial intelligence & machine learning, software as a service, and the sharing economy.  Some have postulated that data is becoming the new oil.  I agree.  

We are covering this space through a variety of thematic ETFs focused on the innovators that are changing our world.  These include The SPDR Kensho New Economies ETF  (symbol KOMP), the iShares Exponential Technologies ETF (symbol XT), the ALPS Disruptive Technologies ETF  (symbol DTEC), the ARK Genomic Revolution ETF (symbol ARKG), the iShares Robotics and Artificial Intelligence ETF  (symbol IRBO) and the iShares Cybersecurity and Tech ETF  (symbol (IHAK). 

Hedge Strategies & Macro Trends:  A hedge is a risk management technique to minimize volatility, reduce risk and improve performance.  Hedge funds have historically used complex techniques such as long/short equity strategies, put/write and covered call options strategies, leveraged dividend strategies, merger arbitrage and tail risk management techniques to achieve these objectives.  Other techniques include momentum and macro-trend following strategies designed to exploit market inefficiencies.  We use several well-regarded ETFs to cover this asset class including the Direxion Work from Home ETF (trend following), the AFGiQ US Market Neutral Anti-Beta Fund (long/short equity), Blackrock Enhanced Equity Dividend Trust (leveraged dividend), the Quadratic Interest Rate Volatility and Inflation Hedge ETF  (tail risk), the Global X NASDAQ 100 Covered Call ETF  (options) and the Amplify Transformational Data Sharing ETF (macro-trend) to gain exposure to transformational blockchain trading technology (which goes well beyond crypto-currency applications).

Conclusion:  If you’ve made it this far, you now have an appreciation for how I spend my time.  Roughly half of my time is spent educating myself and applying what I learn to portfolio construction.  The other half is implementation and responding to individual client needs.  My goal is always to help you achieve your goals as articulated in your financial plan.  The strategy is always evolving in an effort to better manage risk and take advantage of new opportunities as they emerge.  New ideas are constantly being considered for introduction to our disciplined investment framework.  The goal is always to minimize risk, reduce volatility and generate strong long-term returns as we work together to achieve your financial goals.  The goal is simple.  The challenge lies in the design, the implementation and the rebalancing discipline.  That’s my job.  One less thing for you to stress about as we move forward together into this Whole New World. 

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Goldman Sachs: National mask mandate needed to restart US economy

Government mandates to wear a mask in public have become a uniquely hot-button issue in the U.S., which finds itself in the throes of a coronavirus crisis that appears to be drifting out of control by the day.  The debate pits scientific consensus against libertarian philosophy.  The public welfare against individual freedom.  Reasoned thought against inflamed tribal passion.

“Your liberty to swing your fist ends where my nose begins”.  – former Supreme Court Chief Justice Oliver Wendell Holmes, Jr. (addressing pragmatic limitations on liberty.)

Impact on Economic Activity

Goldman Sachs – whose focus is always on business, the economy and making money – weighed in on the debate in a new study released last week.  Goldman observes that “New US coronavirus cases have risen sharply in recent weeks, leading investors to worry that renewed lockdowns will again depress economic activity.”

Jan Hatzius, chief economist at Goldman, says that “a national face-mask mandate would partially substitute for renewed lockdowns that could otherwise subtract more than a trillion dollars from gross domestic product and cripple the US economy.”

Goldman’s new study compares data from 125 countries and scores of US counties with and without face mask mandates.  The researchers concluded that a government order to wear face masks in public “could cut the virus’s infection rate by nearly 60 percent, and reduce fatalities by nearly half.”

Public Confidence

“We find that face masks are associated with significantly better coronavirus outcomes,” they wrote, and this “seems to reflect a largely causal impact of masks rather than correlation with other factors (such as reduced mobility or avoidance of large gatherings).”

Beyond the medical evidence, mandatory face mask usage would also increase public confidence and feelings of personal safety, further increasing the likelihood that individuals and families feel comfortable returning to work, school and other activities.  

Avoiding Lockdowns

Looking at the U.S., the researchers found “face mask usage is highest in the Northeast, where the virus situation has improved dramatically in recent months, and generally lower in the South, where the numbers have deteriorated”.

“For example, only about 40 percent of respondents in Arizona say that they ‘always’ wear face masks in public, compared with nearly 80 percent in Massachusetts.”

“If a face mask mandate meaningfully lowers coronavirus infections, it could be valuable not only from a public health perspective but also from an economic perspective because it could substitute for renewed lockdowns that would otherwise hit GDP,” the researchers wrote.

Their data showed that countries that fail to reach widespread masking usage see both infections and deaths increased.

It Ain’t Over Til It’s Over

The Goldman report comes as Florida, Texas, California and Arizona – the states that have accounted for much of the recent rise in U.S. cases – imposed new restrictions and rolled back their reopening plans.

There are now 10.9 million confirmed cases of COVID-19 world-wide and at least 521,000 people have died, according to data aggregated by Johns Hopkins University. The U.S. continues to lead the world, with a case tally of 2.8 million and death toll of 131,000.  The US has only 4% of the world’s population but more than 25% of virus-related deaths.  

On Monday, Tedros Adhanom Ghebreyesus, the head of the World Health Organization, said that the pandemic is “not even close to being over.”

Still, mask wearing in the U.S. has been lax and not uniform. Hugo’s Tacos, a Los Angeles Mexican restaurant, temporarily closed its doors, claiming that its workers were being bullied for enforcing mask-wearing protocols in their restaurants.

LA, particularly, has seen an explosion of COVID-19 cases, with about 100,000 cases and more than 3,300 deaths.

Tribalism and the Culture War

While science and the rest of the world are largely in agreement, the medical guidance in the US has become embroiled in a culture war.  The US president’s view on mask usage is seen undercutting efforts by public-health officials to encourage the use of facial coverings and other personal protective equipment, or PPE, to halt the resurgence of the infection.

Impact on the Stock Market and Economic Recovery

Concerns about a resurgence of the disease also has created turbulence in the equity markets after the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite Index all surged from the late-March lows on the back of hope that America had gotten a handle of the outbreak, which bullish investors surmised could help to stoke a so-called V-shaped, or sharp, economic recovery.

Goldman warns that failure to issue a timely national mandate on mask wearing will jeopardize the US recovery and potentially lead us into a lasting recession or depression if the virus is not contained.  Community spread has already reached levels that exceed our ability to test, contact trace and isolate.  

A national mask mandate is our only viable solution to quickly returning to economic prosperity.  Public resistance is akin to “cutting off the nose to spite the face”.  Resistance based on anger, mistrust or tribalism will only reduce public confidence, risk further damage to our economy and slow our efforts to restore our nation’s health.

Bill

 

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Pizza, Beer and Getting Punched in the Mouth

When I was a kid living in Tucson, Arizona, my family of seven often packed into our Chevy station wagon and headed to Shakey’s Pizza Parlor on Friday nights.  My ten-year-old self loved Shakey’s.  It wasn’t just about the pizza.  There was something magical about the overall experience.  Shakeys’ was always packed and noisy.  Mechanical “player pianos” pounded out music.  Live musicians in straw hats wandered from table to table, and we all sang along to familiar ragtime tunes.  I loved that we were there as a family and that my parents were momentarily unperturbed by their five rowdy kids, possibly helped along by the free-flowing pitchers of beer.

It’s odd how some small things become seared into our memories, while others simply disappear.  One such odd memory is one of the many comical signs adorning the walls that somehow inexplicably captivated me:   

     “Shakey’s made a deal with the bank.  We don’t cash checks and they don’t make pizzas”. 

I guess that just struck me as quite clever in my ten-year-old mind.  They were setting the rules, but doing so with a bit of humor.  In that spirit, I’d like to roll out my own new rule for you and the other clients of Comprehensive Money Management:

     “CMMS made a deal with its clients.  We’ll help you achieve your financial goals, and you’ll stop worrying about the daily ups and downs of the markets”. 

I’m hard at work doing my part.  Are you ready, willing and able to do yours?

We’re Standing Tall

     “Everyone has a plan until they get punched in the mouth.”  – American philosopher Mike Tyson

Unlike so many others, your plan remains strong and fully intact.  In fact, thanks to this insane volatility, a few new opportunities have emerged that may help us come out stronger on the other end.  Your plan was designed to weather an occasional punch in the mouth, and has handled that well.  You’re still standing and looking good without much added wear or tear.

The New World Order

I’ve spent a lot of time researching coronavirus and COVID-19 – and now – with confidence – I can tell you that I don’t know how this will play out. Nobody does.  It may go away in a month, or it may linger much longer.  The optimist in me thinks that over the next month or two – things will get worse – then will start to get better.  Just as it is hard to see what would ever stop good things from continuing forever, it is also hard for us to see how bad things will end and get better on the other side.

I do believe that capitalism will win – and that pharmaceutical companies will find a cure or a vaccine.  I’ll bet on capitalism – our selfish perpetual engine with the power to do seemingly impossible things.

The realist in me hopes the optimist is right, but suspects that COVID-19 may linger longer than a few months.  How much longer?  We don’t know, and we don’t have to, because you have a solid financial plan that knows how to take a punch and continue to push forward – not in panic – but with dignity and grace.

My Focus

All of my waking hours are focused on continually managing risk, lowering your tax bill, and repositioning your portfolio for the New World Order that lies ahead.  That will likely be a world of economic deleveraging, more people working from home, higher unemployment, lower investment returns and less fervent speculation on Wall Street.  Debt-fueled stock buybacks by corporate CEOs that pumped up stock prices to maximize their bonuses are likely a thing of the past.  Market returns for a diversified portfolio are likely to be no more than 5 to 6% in the coming years.  We’ve prepared for that.  Your financial plan built in to the MoneyGuide Pro financial planning software assumes a 5.5% average annual return.  Even after this recent punch in the mouth, your actual long-term average annual return is still beating that goal.  Your investment portfolio and overall financial plan remain solid and fully intact.        

Taking Action

I’m not sitting still.  For the past two weeks, I’ve been furiously rebalancing and harvesting losses in taxable accounts.  I’m adding value by capturing the loss in select securities for tax purposes, even as the replacement security is positioned to catch the rebound.  I’ve also begun to make a few strategic changes in individual investment selections within the confines of your overall asset allocation plan.

     “Life can only be understood backwards—but it must be lived forwards.” – Søren Kierkegaard

Within your EQUITY allocation (the “engines”), I’m gradually switching from ETFs that invest in the broader markets to those that focus primarily on high quality, cash rich companies with strong balance sheets.  I’m de-emphasizing REITs that invest in all property types (including shopping malls and office buildings) in favor of those that focus on trends with sound demographic underpinnings, such as medical offices, senior housing and hospitals.  I’m repositioning the portfolio in recognition that many small businesses will fail – and many industries will never be the same.

Within your FIXED INCOME allocation (the “brakes”), I deemphasized higher-yield corporate bonds long ago in favor of safer US treasury securities.  You have been rewarded for that move, as both short and long-term treasuries have soared while corporate bonds have faltered.

Within your REAL ASSETS allocation (the “diversifiers”), gold, alternative strategies and other hedges are playing their part by cushioning the portfolio from uncertainty, economic turmoil, and corporate and consumer deleveraging.  Who would have thought that Brent crude would be trading at $4 a barrel – well below the price of water – which it did earlier this past week?  Or that gold would quickly rise by 25% in a few short weeks after many years of a slow and torturous decline?  The diversifiers in your portfolio serve us well when the unexpected strikes, or when the engines falter and the brakes fail.      

Consumer behavior will change due to this virus; and consumers are 70% of the US economy.  I’m working hard to anticipate and get out in front of these changes before they are fully known and appreciated by the wider world.

We’ll Get Through This Together

I told you earlier what I don’t know about this virus.  Nor do I have a crystal-clear picture of its impact on our consumer-driven economy.  What I do know is that you can have clarity, or you can have undervaluation; you cannot have both. Today we have anything but clarity, but undervaluation is coming to us real fast.  Bargains only happen when people are confused and truly scared. 

For an added confidence booster, I recommend that you revisit my earlier blog “What Do I Own and Why Do I Own It?”.  A newly updated and revised copy is attached.  Each of the investments in your portfolio – the engines, the brakes and the diversifiers – play a critical role.  They work together to produce the best possible long-term outcome and maximize your long-term wealth.

So, let me do the strategizing and the worrying and help you navigate these volatile markets.  We may not yet be at a market bottom, but I’m convinced that the things we own today offer compelling long-term value once we get past the current period of uncertainty.  I also believe that investors will be rewarded for adding new money to their investment portfolios at these levels. 

Maintaining a long-term time horizon is paramount.  Every decision we make, we need to make from the perspective not of tomorrow, next week or even next year – but three to five years from now. 

That’s why investing is hard. 

 

Bill

 

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My Support for You in a Crisis

Good evening.

I’m sure you don’t have to be told that our country – and the world—are in a big awful mess.  The Covid-19 virus has disrupted everything: our sense of personal safety, our jobs, the economy, and – for an undefined period of time – our investment portfolios. 

I’m reminded of the stories my mom and dad shared with me about growing up during the Great Depression and World War II.  They were stories of collective sacrifice as the world faced great and sometimes mortal threats.  Of course, my parents survived (or else I wouldn’t be here), and we both know that our society will survive this as well. 

Perhaps a silver lining is what doesn’t kill us makes us stronger.  I’m hopeful that this crisis will bring us together as one nation and one world.  We are all human, and all a bit fragile.  This pandemic also reminds me that we are all on this planet for a short period of time.  Perhaps this crisis may help us re-learn what is truly important and what is less so. 

There is nothing that brings people together like a common enemy.  This time that enemy is COVID-19 and the threats that it presents to our physical and financial health.  I’m writing, not because I can add much to what you’re already getting from the media, but because I deeply want to proactively comfort you and lighten your load a bit if I can.  Let me offer these thoughts in no particular order.

Keeping your head when all others are losing theirs

I would ask you to recognize that we are ALL experiencing a lot of stress as we navigate through this pandemic.  You do not need to worry.  I’m doing that for you!  I lie awake at night thinking about you and my other clients.  I’m spending many of my waking hours looking for opportunities that will help us come out stronger on the other end.  I’m also thankful that tax season is largely behind me, with nearly 100 client tax returns already filed or ready to file.  That frees up my time to rebalance, harvest tax losses, and look for new opportunities.  I’m taking action to protect your portfolio, reduce future taxes, and reposition your investment portfolio for the gains ahead.

Herd mentality

We all need to recognize that we’re all part of the human herd.  By that I mean that you probably share the instinct to sell and get out of the way of whatever the market does in the highly unpredictable near future.  Our fight or flight instincts tempt us to retreat to the sidelines.  Even those of us who manage investments for a living are not immune.   The outcries of the irrational, instinctive part of our brain – which scientists tell us is the most powerful – is screaming right now. 

This is precisely why investing is not easy. 

We are all emotionally affected by the events of the world.  Neither you nor I are immune from human emotion.  But despite all the emotional pressure, our higher cognitive functions must remain in control. 

Are you currently thinking like a lizard, rabbit or Dr. Spock?

Scientists tell us that the human brain has three parts, the cerebral cortex at the top (which makes us rational humans), the cerebellum immediately below (which has the intelligence of a rabbit), coordinates muscular activity, and then the limbic brain at the top of your spinal cord, which controls fight or flight reactions.  That bottom nodule of thinking tissue has roughly the same intelligence as a lizard.

When humans encounter danger (and the recent market behavior certainly qualifies, particularly when it is also associated with a life-threatening pandemic and global economic shutdown), the mind instinctively retreats to the limbic brain.  Which means that many of us are currently functioning with the intelligence of a lizard.  It’s in that kind of environment that a disciplined investment strategy really shines!

Don’t feel bad if you find yourself thinking like a lizard at this moment.  We all do that from time to time.  The key for each of us is to recognize what is happening with our biology, tame the fight or flight automatic impulses of our limbic brain, and strive to react more like Dr. Spock. 

What to do? 

If you feel shut down by fear, I understand what that feels like and empathize with your feelings.  I’m here to listen.  Sometimes just talking things through can pull the locus of our awareness out of the bottom of the brain toward the top. 

Focus on the opportunities:

The market turmoil is giving us a rare opportunity to add value to our financial lives.  I feel like a kid in a candy story when I’m harvesting tax losses and reestablishing cost basis across your portfolio.  I’m also looking for opportunities to perform Roth IRA conversions at these lower valuations.  And of course, the treasury bonds, infrastructure, precious metals and cash in your investment portfolio can be redeployed at a time when stocks are on sale, giving portfolio returns a boost once we get to the other side of this crisis and the economy recovers again.

What’s Next?

I hope that you were not expecting me to tell you how long the Covid-19 epidemic will last, or to measure its long-term economic impact, or have any insights into when the markets will eventually recover.  Of course, I have no idea of any of those things – and nobody else does either.  Humility is a good thing to have when you’re forecasting the economy or markets. You never know what relevant facts you might be missing, so it’s best not to be too confident.  Those of us who have experienced three major downturns (or four if you experienced Black Monday crisis back in 1987) remember how unexpected they were, how experts and pundits were caught by surprise, and how wrong they were when they tried to tell us what was coming next.

The Long Term:

I only know one thing: which direction the next 100% movement in the stock market is going to be.  Long term investors know this.  Throughout recorded history, investment portfolios typically double every ten or twenty years, especially when measured from what could be close to a market low.  Cash may feel good right now, but it is guaranteed to lose value after considering inflation.  Of course, getting out of markets may feel satisfying in the moment, but it begs the question of when to get back in.  Most of us can’t finance our retirement earning less than 1% per year. 

Selling low and buying high is not a winning investment strategy.  Neither is consistently selling during market downturns and buying back in at market highs.  Our highly diversified 7/20 model (seven primary assets classes and 20 sub-asset classes), routinely rebalanced, is a winning strategy.  It has consistently provided high single digit returns with fewer negative years than any other strategy (see 47-year analysis attached).  Note the worst three-year rolling return for this strategy was -13%.  This is also a strategy that on average has resulted in a doubling of value every 7 to 10 years.  This is not a strategy practiced by lizards.  It is a strategy created by and faithfully followed by academics and the smartest minds on Wall Street who think and react more like Dr. Spock.

Bill’s crystal ball

I’ve been writing and publishing blogs for my clients every quarter now for 18 years.  My long-term clients may remember that I often signed them “Dr. Doom”.  I’ve always been a bit of a contrarian.  I have found that tendency has served me well over time.  That also manifests itself in feeling more optimistic when those around us are losing their heads.  That’s where I am today.  I suspect that the short-term pain is not over.  But for long term investors, when Wall Street sees “blood in the streets”, it has always proven in retrospect to be a great time to invest for the long term. 

If you need help getting through this crisis, please let me know. 

Please accept my best wishes, my sympathy, and my support as you and your family navigate this crisis together.  Rest assured that you are never far from my mind, and that I’m working diligently to ensure that your investment portfolio comes out of this crisis well positioned for the rebound that will inevitably come.  I’m glad to have you as a client and am lucky to have a job that I truly love. 

Be kind.  Be smart.  Be well.

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Contact Info

Comprehensive Money Management Services LLC
535 Vilabella Avenue
Coral Gables, FL 33146
Phone 305-662-7757
Fax 305-402-8409
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Disclosures

Comprehensive Money Management Services LLC (“CMMS”) is a Registered Investment Adviser located in Coral Gables, Florida. The firm is registered with the State of Florida Office of Financial Regulation. CMMS and its representatives are in compliance with the current filing requirements imposed upon Florida-registered investment advisers and by those states in which CMMS maintains clients.

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