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Month: August 2017

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North Korea News – Geopolitics and the Markets

There once was a time when the threat of nuclear war hung over America’s head like a storm cloud that just wouldn’t go away.  Those days, thankfully, are long over—but the sky turned a little bit grayer lately.

As you probably know, tensions have surged recently thanks to news that North Korea has “produced a miniaturized nuclear warhead that can fit inside its missiles.”1  President Trump fanned the flames even more when he stated that any attack by North Korea “will be met with fire and fury.”2

Since we are financial advisors, we’ll leave military concerns to the generals.  The question we’re most interested in—and the question many people have asked us—is how all this saber rattling will affect the markets.  Since we don’t have a crystal ball, there’s no way we can know for sure.  But history would suggest that it won’t have much effect at all.

The financial services industry often likes to stress that “past performance is no guarantee of future results.”  The reason is because we’ve seen time and time again that just because something happened a certain way before doesn’t mean it will automatically happen that way again.  On the other hand, there’s another saying that’s equally valid: there’s nothing new under the sun.  In this case, international crises are nothing new.  That means we have a lot of history to turn to when trying to gauge just how tensions with North Korea might impact the markets.

Geopolitics and the Markets

Think back on all the major international events you’ve lived through; terrorist attacks and wars; economic recessions and elections; the Cuban Missile Crisis; the JFK assassination; the 1973 Arab oil embargo; the fall of the Berlin Wall; the 9/11 attacks; and Brexit.  Unless you’re very young, you’ve probably witnessed many periods that seemed full of tension, drama, and importance.

But they rarely have much effect on the markets.  Or rather, they rarely have a sustained effect.

Take the Cuban Missile Crisis.  The world has probably never been closer to nuclear war than during those nerve-wracking thirteen days in 1962, yet during that time, the Dow® only fell 1.2%.  By the end of the year, the Dow was up 10%.3

More recently, look at Brexit.  When the UK voted to leave the European Union, it took most analysts by surprise, and many predicted it would lead to a major drop in the markets.  At first, it did.  The vote took place on a Thursday.  The next day, the Dow fell over 600 points, and then another 250 points the Monday after.4

But less than a month later, the Dow climbed to a new record high.5

A couple of weeks ago, the business with North Korea prompted the S&P® to fall about 1.3%, its worst week in months.6  But last Monday, the S&P rose 1%, suggesting investor fear was short-lived.7

Of course, major events will sometimes cause a larger, longer drop.  When World War I began, the Dow fell 30%, then closed for six months.3  After the 9/11 attacks, stocks dropped almost 15% over a two-week period.3

But even then, the markets recovered with amazing speed.  For example, during the second year of World War I, the Dow rose more than 88%.3  And only a few months after 9/11, both the Dow and the S&P returned to normal.3

That’s a lot of numbers.  So, what’s the takeaway from all this?

There are a few things we can learn from history.

First, we can learn that while geopolitical events often seem scary, their impact on the markets isn’t necessarily huge.  That’s because many things impact the markets.  Even something as big as the threat of war is only one ingredient in the dish, and it’s often buried and forgotten when the next headline hits.

If you think about it, the markets are essentially like giant aircraft carriers.  It takes a lot to make them swing one direction or another, especially over a lengthy period of time.

Here’s the second thing we can learn.  We said a moment ago, that geopolitical events often seem scary.  We believe that’s why you often see a brief drop after they occur—because they seem scary, prompting the most jittery investors to sell.

But as you know, we must always strive to avoid making emotional investment decisions.  That’s especially true when it comes to headlines and geopolitical events.  Do they matter?  In the grand scheme of things, yes.  Do they matter to the markets?  Again, yes—but not nearly as much as people think.

Remember, it’s impossible to predict what the markets will do.  So, we’re not predicting here about whether the markets will climb or fall.  We’re saying the recent news about North Korea shouldn’t prompt us to make assumptions one way or the other.  Nor should it change how we invest.

Instead, we’ll keep doing what we always do.  We’ll keep our heads and hold to our long-term strategy.  In our experience, the ability to do that is far more valuable than any crystal ball.

If you have any questions about the markets, or your own portfolio, never hesitate to ask.  Our team is here for you.  In the meantime, enjoy the rest of your summer!

Sources

1 Joby Warrick, Ellen Nakashima, Anna Fifield, “North Korea now making missile-ready nuclear weapons, U.S. analysts say,” The Washington Post, August 8, 2017.  https://www.washingtonpost.com/world/national-security/north-korea-now-making-missile-ready-nuclear-weapons-us-analysts-say/2017/08/08/e14b882a-7b6b-11e7-9d08-b79f191668ed_story.html?utm_term=.0d2f43723e39

2 Bryan Bender and Jacqueline Klimas, “Trump’s ‘fire and fury’ threat to North Korea sparks new fears of war,” Politico, August 8, 2017.  http://www.politico.com/story/2017/08/08/trump-north-korea-warning-241409

3 Ben Carlson, “How markets reacted to geopolitical crises,” The Economic Times, April 13, 2017.  http://economictimes.indiatimes.com/markets/stocks/news/how-markets-reacted-to-geopolitical-crises/articleshow/58158842.cms

4 Jethro Mullen, Ivana Kottsaova, Patrick Gillespie, “Dow plunges over 600 points as U.K. ‘earthquake’ crushes global markets,” CNN Money, June 24, 2016.  http://money.cnn.com/2016/06/23/investing/eu-referendum-markets/index.html?iid=EL

5 Matt Egan, “Stocks have never been higher,” CNN Money, July 12, 2016.  http://money.cnn.com/2016/07/12/investing/dow-stock-new-high-record/index.html

6 John Ydstie, “North Korea has markets neverous but not panicked,” NPR, August 11, 2017.  http://www.npr.org/2017/08/11/542856313/north-korea-has-markets-nervous-but-not-panicked

7 Sue Chang and Ryan Vlastelica, “U.S. stocks gain 1% for the first time in 3 months as geopolitical fears ebb,” MarketWatch, August 14, 2017.  http://www.marketwatch.com/story/dow-futures-flirt-with-100-point-gain-as-north-korea-fears-put-on-back-burner-2017-08-14

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Newton’s Third Law

Over the last two months, we’ve discussed something called Newton’s Laws of Finance.  They’re our spin on Sir Isaac Newton’s famous “Laws of Motion” that you probably learned about in school.

This month, let’s look at the third and final law.  The original is probably the easiest for non-scientists to remember:

For every action, there is an equal and opposite reaction. 

This law is easy to understand.  Imagine shooting a cannonball.  The ball will fly in one direction, while the cannon will roll backwards in the opposite direction.  The same principle applies when firing a gun.  The “kick” you feel is just Newton’s third law saying hello.

So how do we apply this to finance?  Like this:

For every financial action, there is an opposite reaction.

Or, to put it another way: for every financial decision you make, there is the potential for an unintended consequence.

Here’s what we mean.  Let’s say you own 100 shares of XYZ Corporation.  The value of your shares has gone up recently, so you decide to sell.  You’ll make a nice profit, and have a quick infusion of cash that you can use however you want.

You’ve also triggered a capital gains tax.

Or, let’s say you decide to allocate more of your investment portfolio to bonds instead of stocks.  Bonds are traditionally thought of as providing more safety than stocks, and who doesn’t want more safety?

But you also miss out on next week’s stock market rally.

In the first scenario, you turned a profit, but also generated taxes.  In the second scenario, you traded in growth for safety.

For every financial action, there is an opposite reaction.  One aspect of your financial life goes in one direction, a second aspect goes in another direction.

Of course, you could flip these scenarios around.  Maybe you decide to hold onto your XYZ stock, because you don’t want to trigger capital gains taxes.  But next week, the stock falls sharply in price. You avoided taxes, but not losses.

Maybe you decide to allocate most of your portfolio to stocks and have very little in bonds.  You’ll give yourself more opportunity for growth … but take on more risk, as well.

The point of all this, is that when people make a financial decision, they often make it without truly thinking about the consequences.  They act without understanding the inevitable reaction.  They want something, so they decide to get it.  They fear something, so they decide to avoid it.  It’s not that those decisions are necessarily bad.  It’s that they’re made without seeing the whole picture.

Put it this way: an experienced gun owner always braces for the kick before he or she fires.

Whatever financial decisions you decide to make, it’s critical that you brace for the kick.  Every decision has consequences.  Some are positive, some are negative.  Some are intended, some aren’t.

For every action, there is an equal and opposite reaction.

Financial advisors like us often use the word holistic when we describe what we do.  For instance, holistic financial planning.  Holistic investment management.  “Holistic” simply means that we understand that the individual parts of something are interconnected, and they must always be seen that way.  They are parts of a whole.  Newton’s Third Law of Finance shows exactly why the word “holistic” has meaning.  Whenever you make a financial decision, you must make it with the whole of your financial situation in mind. 

Example: when you make a decision regarding your investments, it can also affect your taxes.  Your estate.  Your cash flow.  Everything.

So, how do you obey Newton’s Third Law?  Well, whenever you need to make a financial decision, always ask yourself: what are the pros and cons of this decision?  What are the benefits?  What are the risks?  How will this decision affect my entire financial life?

It sounds simple.  But it’s also the best way to brace for the kick. 

Scientists have long used the original Laws of Motion to better understand and control the world around them.  By understanding the Laws of Finance, you can better understand and control your finances.

Good luck!

“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.”

– Sir Isaac Newton

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If you can dream it, you can do it.

Our friends and our clients (sometimes they’re the same person) often ask us: “What’s the most important thing I need to do to prepare for retirement?”

We usually tell them there’s no one thing that’s most important, but rather a lot of things.  For example: securing retirement income, managing your tax situation, or ensuring your investment portfolio keeps ahead of inflation.  These are just a few examples.  But when it comes to your retirement, here’s a piece of advice that all too often goes unheeded:

“If you can dream it, you can do it.”

Retirement is about finally having the opportunity to focus on living.  It’s no longer about getting ahead in life, but about experiencing life itself.  For that reason, retirement should be fun.  It should be enlightening.  It should be rejuvenating.  Above all, retirement should be … whatever it is you want it to be!

However, there are many people who never take the time to dream.  They never create their bucket list; never ponder their deepest, sweetest desires.  It’s quite possible to spend too much time worrying about how to retire and not enough on why you’re retiring, or what you want to do in retirement.  People who make this mistake run the risk of experiencing the worst scenario of all:

Boredom.

To prevent that from happening, all you need is a plan.  All you need is to dream.  So what’s your plan for retirement?  What’s your dream?  Here are a few suggestions:

Write the next Great American novel.

Raise horses on your farm.

Start an entirely new career as a standup comic.

Learn how to cook Italian food … in Italy.

Work as a tour guide at the Guggenheim. 

Follow the voyage of Darwin’s Beagle through the Galapagos.

Listen to jazz in a smoky bar in Paris.

Have the freedom to do what interests you versus what needs to be done.

Design and build your own house. 

Compete in AAU Masters swimming at 80.

Spend a year in Rio.

Restore an old sports car and drive to car shows.

Work for human rights for people in third world countries.

Build a log cabin from the ground up.

Retrace the Endless Summer surf odyssey.

Drop anchor at every island in the Caribbean.

Build your collection of fine wines.

Spend time with your grandchildren.

You want more?  You can definitely do more.  Like:

Create a beautiful garden.  Give your spouse a chance at a career.  Ski for 100 days a season.  Volunteer.  Finally, finally use all of your frequent flyer miles.  Create a world that consists of nothing but a hammock, a pitcher of lemonade, and a stack of novels.  Return to your family’s farm and try to make a go as a farmer.  Participate in guided tours of all the ancient wonders of the world.  Open your own bed and breakfast.  Finally get your college degree.  Trek to the Himalayas.  Visit all 50 states.  Start another career.  Scuba dive all over the world.  Visit every major-league ballpark.  Relax.  Go on a Safari in Africa.  Write movie reviews for the local weekly.  Climb a 20,000 foot mountain.  Rent a barge for a canal tour in Europe.  Invest in startup companies.  Coach youth soccer, baseball, and basketball.  Drive from Alaska to Patagonia.  Run the Boston and New York marathons.  Play as many of Golf Digest®’s top-100 courses as possible.  Play in a garage band.  Play bridge for money.  Just play!  Go on at least three cruises a year.  Act in Community Theater.  Dinner and a movie … every night!  Learn to play the piano.  Be a couch potato.  Fix the sink.  Take a trip down the Nile.  Read Russian novels.  Run for local political office.  Absolutely nothing.  Give back to all of those who helped you.  Do all of the things you’ve been afraid of—skydiving, bungee jumping, and hang gliding.  RV along Route 66 with your spouse and your dogs.

Finances are more than just numbers and concepts.  Maintaining your finances is about living the life you always wanted to live.  If your retirement is coming up, it’s time to start planning.  More than that, it’s time to start dreaming.

So if there’s one piece of advice we can give you, it would be this:

“If you can dream it, you can do it.”