Buffett Takes a Bow: 7 Lessons from an Iconic Investor
At the age of 94, Warren Buffett recently announced his retirement as CEO of Berkshire Hathaway, the massive holding company he has controlled since 1965.1
Buffett is a venerated investor due to his financial success and long track record of stock market outperformance. The value of Berkshire Hathaway shares grew by 19.9% per year (annualized) over the six decades from 1965 to 2024, compared with a total return of 10.4% per year for the S&P 500 Index over the same period.2
Buffett’s investment strategy evolved into a blend of quality and value — which means he identifies well-run companies with solid balance sheets that are priced fairly based on their intrinsic value (the earnings and cash flow that the underlying business produces for shareholders).3 Having bought his first stock at age 11, he became known for diligent research and diving deep into the financial statements of his businesses and acquisition targets.4
Nicknamed the “Oracle of Omaha,” Buffett has frequently shared his thoughts on finance and investing in media interviews, at Berkshire’s annual meetings (often called the “Woodstock of Capitalism”), and in his widely read letters to shareholders. As a result, his admirers have access to a treasure trove of investment fundamentals and words of wisdom that might help improve their own financial lives.
Here are seven important financial lessons to be gleaned from a selection of Warren Buffett’s notable quotes.5
1. Keep your lifestyle in check, so you can put money to work
“Do not save what is left after spending; instead spend what is left after saving.”
Despite his billionaire status, Buffett lives in the same modest house in Omaha that he has owned since 1958.6 Automatically diverting a set portion of every paycheck to a savings account, workplace retirement plan, or an IRA is a convenient way to save money you might otherwise be tempted to spend on a more expensive home or car. These savings could then be invested to help reach future goals.
2. Play the long game
“Buy into a company because you want to own it, not because you want the stock to go up.”
In Buffett’s view, investors should have an ownership mindset rather than thinking like a speculator. Speculators take large risks by trying to anticipate future price movements in hopes of making quick gains. The problem with this approach is that few people have the expertise, time, and resources to do this successfully. It’s more likely that by trying to time the market, they will sell at the bottom and buy at the top. They might miss some of the best trading days, and their portfolios will likely underperform.
Long-term investors take risks, too, but generally they buy quality assets and strive to build a balanced portfolio that is appropriate for their goals, time frame, and risk tolerance.
3. Evaluate your exposure to risk
“Only when the tide goes out do you discover who’s been swimming naked.”
Market risk refers to the possibility that an investment will lose value because of a broad decline in the financial markets caused by unexpected economic or sociopolitical developments. It would be prudent for the risk profile of your portfolio to align with your risk tolerance, or your ability to endure periods of market volatility, both financially and emotionally. This typically depends on your current financial position as well as your age, future earning potential, and time horizon — the length of time before you expect to tap your investment assets for specific financial goals.
4. Be brave when the market is scary
“Be fearful when others are greedy and greedy when others are fearful.”
The silver lining of a steep market downturn is the opportunity to buy quality stocks that you may have longed to own at much lower prices, just as Buffett did in the depths of the 2008 financial crisis.7
5. Hold on to humility
“In the business world, the rearview mirror is always clearer than the windshield.”
Buffett is willing to acknowledge his blind spots and admit his past missteps. In his latest letter to shareholders, he pointed out that he used the words “mistake” or “error” 16 times in his communications during the 2019 to 2023 period.8
Some investors (professionals and amateurs alike) overestimate their skills, knowledge, and ability to predict probable outcomes. But there’s danger in overconfidence; it may cause you to trade excessively and/or downplay potential risks.
6. Take care of the people who matter to you
“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you.”
A thoughtful estate plan is more than a set of documents to pass down wealth and help reduce potential estate taxes after you die. It can be crafted to reflect your values, leave a positive legacy through philanthropy, and help protect your loved ones in your absence. Plus, by clearly stating your intentions in a will or trust, you can help family members prevent disputes during a painful and stressful time.
7. Don’t go it alone
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. You must supply the emotional discipline.”
Even the most experienced investors might benefit from an outside perspective. A trusted financial professional can help you develop an investment strategy that’s tailored to your specific situation, while providing ongoing support that may help keep you from making costly, emotion-driven mistakes.
Although there is no assurance that working with a financial professional will improve investment results, a financial professional can provide education, identify strategies, and help you consider options that could have a substantial effect on your long-term financial prospects.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The S&P 500 is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance does not guarantee future results. Actual results will vary.
1, 4) The Wall Street Journal, May 3, 2025
2–3) Bloomberg, May 4, 2025
5) Goodreads.com, 2025; Wikiquote.org, 2025; BrainyQuote.com, 2025; AZQuotes.com, 2025
6–7) Bloomberg, May 3, 2025
8) Letter to Berkshire Hathaway shareholders from Chairman Warren E. Buffett, 2025
New Tariffs Drive Market Volatility
April 2, 2025, President Trump announced sweeping tariffs on imported goods that were significantly larger and different in structure than expected. The announcement was carefully timed to coincide with the close of the New York Stock Exchange to avoid immediate market volatility. But over the next two days, the S&P 500 — generally considered representative of the U.S. stock market — plunged by 10.5%. The Dow Jones Industrial Average lost 9.3%, and the tech-heavy NASDAQ index dropped 11.4%.1 The two-day rout erased $6.6 trillion in market value, the largest two-day shareholder loss in U.S. history.2
Market volatility continued on Monday, April 7, with prices swinging widely throughout the day, but the final results were more moderate. The S&P 500 dropped slightly by 0.23%, the NASDAQ was up slightly by 0.10%, and the Dow fell 0.91%.3
Obviously, a quick market drop is cause for concern, but it’s important not to overreact and to maintain a steady eye on long-term goals. It may be helpful to consider the causes of the current market volatility along with a longer-term view of market trends.
A surprising approach
The tariffs announced on April 2 were promised as a program of “reciprocal tariffs,” which are traditionally defined as matching the tariffs other countries levy on U.S. goods and theoretically leveling the playing field. Determining reciprocal tariffs typically requires exhaustive analysis of a complex web of global trade rules on tens of thousands of products. Investors hoped for a moderate, measured program, and it’s notable that the S&P 500 actually rose steadily in the three trading days before the announcement.4
The tariffs the president announced took investors by surprise. They were not reciprocal tariffs by the traditional definition but rather based on the trade deficit in goods between the United States and a given country. Trade in services, in which the United States often has a surplus, was not considered.
Specifically, the tariff was calculated based on the ratio of the country’s 2024 goods trade deficit with the United States to the total value of its goods exports to the United States, multiplied by one half. Thus, if Country A sold $200 billion in goods to the United States and bought $100 billion in U.S. goods, the deficit was $100 billion, and the tariff was calculated as $100B/$200B = 50% x ½ = 25% tariff. Nearly, all countries were assessed a minimum 10% tariff, regardless of the balance of trade, but Canada and Mexico, which already have substantial tariffs due to previous actions, are exempt from the new round. Other exceptions include Russia and North Korea, which are under trade sanctions.5
The Trump administration maintains that this calculation will close trade deficits, but most economists believe that such deficits are not necessarily bad or the result of unfair trading practices — and the calculation resulted in unexpectedly high new tariffs.6 The European Union, which provides almost one-fifth of U.S. imports, was assessed a 20% tariff, while China was assessed 34% on top of the recent 20% boost and other tariffs already in place. Other important sources of imports with high new tariffs include Vietnam (46%), Taiwan (32%), India (27%), South Korea (26%), and Japan (24%).7 Tariffs on most countries are now higher than the tariffs they charge for U.S. goods, and even countries that buy more U.S. goods than they sell, such as Australia and Argentina, will still pay the 10% minimum tariff.8–9
Concerns and potential revenue
There is an adage that the market doesn’t like surprises, and part of the market reaction was due to the unusual approach, with an untried calculation, higher-than-expected tariffs on many trading partners, and a minimum tariff on nearly every country of the world. But there is also a fundamental concern that these tariffs, on top of previously levied tariffs, will increase consumer prices to a level that seriously slows consumer spending, the driving force of the U.S. economic engine. Higher import prices can also hurt U.S. companies that depend on imported materials and parts, while retaliatory tariffs and other economic sanctions could hurt U.S. companies that export goods and/or do business abroad.
On the other hand, the Trump administration’s stated goals are to stimulate U.S. manufacturing, address unfairness in international trade, and increase U.S. revenue, which could be used to decrease other taxes. Trump economic advisor Peter Navarro estimated that the tariffs could raise more than $6 trillion over ten years. This estimate is likely on the high end, because it assumes that tariffs, trade, and consumer behavior will not change. But revenue approaching that level could pay for extending the 2017 tax cuts, which are scheduled to expire at the end of 2025 and could decrease revenue by about $4.5 trillion over the next ten years if extended.10
Moreover, the tariffs as announced may be intended in part as a starting point for negotiations. President Trump and Vietnam’s leader, To Lam, have already begun discussions, with Lam offering to reduce his country’s tariffs on U.S. goods to 0% in return for reduction of the U.S. tariffs. It’s likely that there will be negotiations with many key U.S. trading partners as the tariff program evolves.11
Investing for the long term
Although it is impossible to predict the market, you can probably expect volatility for some time. The NASDAQ Index officially entered a bear market — a loss of at least 20% from a previous high — at the end of trading on April 4, while the S&P 500 Index — down more than 17% from its recent high — is approaching bear territory.12–13 While any substantial decline can be worrisome for investors, it’s important to remember that markets are cyclical. Regardless of the reasons for a downturn, the market has always bounced back. Here are some other considerations that may help provide perspective:
- After a down year in 2022, the S&P 500 gained 24.23% in 2023 and 23.31% in 2024, the largest two-year increase since 1998.14–15 Although 2025 has been rocky, the index set an all-time record on February 19, 2025, after the initial round of tariffs was announced.16 So the current market turmoil is coming after a period of unusual strength. While it may be disturbing to watch the value of your investments decline, the current drop is from a high level, and the current value of your portfolio might be similar to what it was at a time when the value seemed satisfying.
- The losses you see in your investment account are only paper losses until you sell. Panic selling locks in those losses. Historically, some of the best days of stock market performance have followed some of the worst days. No one can predict market direction, and pulling out of the market due to an emotional reaction can lead to missing gains on the way back up.
- A down market can offer buying opportunities, but no one knows when the market has reached bottom, so — as with selling — purchasing decisions should be made rationally based on a long-term strategy.
- Since 1928, the S&P 500 Index (including an earlier version) has returned an annual average of about 10%, but annual returns have varied widely.17 Over 97 years, there have been 65 positive years, 30 negative years, and two flat years.18
- During this same period, there have been 24 S&P 500 bull markets (not counting the current bull) and 23 bear markets. The average bull market lasted 1,102 days and had a positive return of 121.4%. The average bear market lasted 340 days and had a negative return of -36.8%.19 Put simply, bulls have lasted longer than bears, and bull gains have substantially eclipsed bear losses.
Past performance is not a guarantee of future results, but the clear message in these statistics is that it pays to be patient and stick to your long-term strategy. This is true during any period of market volatility, but the current situation — primarily driven by the reciprocal tariff regimen — is still so new and subject to change, it may be unwise to place too much emphasis on the initial market reaction. Even if the president maintains the current trade policy, the U.S. economy and the U.S. stock market have proven time and time again to be resilient and adaptable to changing economic conditions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. The S&P 500 Index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.
1, 3–4, 13, 16) Yahoo Finance, April 7, 2025
2) Morningstar, April 4, 2025
5, 7, 9) The New York Times, April 4, 2025
6, 8) The Wall Street Journal, April 7, 2025
10) CNBC, April 2, 2025
11) The New York Times, April 6, 2025
12) Reuters, April 4, 2025
14) S&P Global Indices, 2025
15) MarketWatch, December 31, 2024
17) Investopedia, December 26, 2024
18) www.macrotrends.net, 2025
19) Yardeni Research, January 21, 2024
Data for Sale: Tips to Help Protect Your Private Information
The Federal Trade Commission (FTC) announced on December 3, 2024, a proposed settlement in legal action against a data broker named Mobilewalla, which was accused of using location data obtained through online advertising auctions to identify consumers by factors such as private home address and visits to health-care clinics and churches.
In an online auction, a data broker bids to place “real-time” ads for its clients on a consumer’s cell phone or other mobile device, based on consumer data shared in the auction, which typically includes a unique mobile advertising identifier (MAID) and the consumer’s location at the time of the auction. The FTC alleged that Mobilewalla retained data regardless of whether it won the auction and made no reasonable effort to determine if consumers had given permission to use their data.
According to the complaint, between January 2018 and June 2020, Mobilewalla collected more than 500 million MAID/location pairings and sold the raw data to advertisers, data brokers, and analytics firms. The company also used the data to create audience segments for their clients by processing it through virtual “geofences” around specific sites. For example, MAIDs that appeared within geographic coordinates around pregnancy centers were used to build audience segments targeting pregnant women. Other targeted sites included churches, labor offices, LGBTQ+ locations, and political or protest gatherings.
A gray area
Regulation of data brokers is a gray area, and this is the first time the FTC has alleged that obtaining consumer data from online advertising auctions for purposes other than participating in the auction is an unfair practice. On the same day the FTC released its proposed settlement, the Consumer Financial Protection Bureau proposed a rule requiring data brokers who sell certain sensitive consumer information to be considered consumer reporting agencies under the Fair Credit Reporting Act, which would require them to follow more rigorous practices regarding accuracy, safeguards, and consumer access to their own data. For now, however, this rule and the FTC settlement are only proposals.
Privacy vs. convenience
Regardless of government regulations, the burden for protecting your private information falls primarily on you. Personal data is a valuable commodity, and there will always be entities, whether criminals or legitimate businesses, who want to obtain and use your personal information. Protecting your data takes work, and you may have to choose between privacy and convenience.
Basic security
Data brokers like Mobilewalla are not directly stealing data, but there are plenty of criminals who try to do that every day. A sound security strategy starts with creating a unique strong password for every site and using two-factor authorization for any site containing sensitive information. Never click on links in a text, email, or website unless you know exactly where the link is going to take you. Don’t reply to emails unless you know the sender. Criminals can “spoof” an email address by making the name appear legitimate. Check the actual email address behind the name and look carefully at logos or other content used to make a spam email look legitimate — it’s typically easy to see that it is not. For more tips on data security, see consumer.ftc.gov/articles/protect-your-personal-information-hackers-and-scammers.
Control what you reveal
Basic security measures may help protect you from criminals, but if you are like most people, you are giving away personal data every day. Here are some tips to limit what you offer.
Turn off tracking. The MAID number on your mobile device allows it to be tracked across websites. Unless you want personalized ads, there is generally no reason to allow tracking. On an iPhone or iPad, go to Settings > Privacy & Security > Tracking and turn off Allow Apps to Request to Track. This will prevent apps from tracking in the future and prompt you to revoke permission for any apps you have allowed to track. Apple also has its own targeted ad system, which you can disable at Settings > Privacy > Apple Advertising. On an Android device, go to Settings > Privacy > Ads and tap Delete Advertising ID. Or you can tap Reset Advertising ID to delete past tracking and create a new ID for future tracking.
Limit cookies and delete browser data. Cookies are small packets of data that allow a website to identify you. Some cookies are necessary, but most are not. Many websites offer an option to limit usage to functional cookies. You can set global rules for cookies in your browser and/or use private browsing mode. It’s a good idea to clear your cookies and other browser data regularly. This option can be found with browser settings, and you will typically be able to choose the type of data and timeframe to delete.
Limit geolocation data. Your phone goes where you go, so any app that has access to your location is tracking valuable private information. Some apps — such as a map or compass app — obviously need access to your location. But most apps do not. You can set location permissions for each app in your phone’s settings.
Be aware that your phone may be listening. If you use a virtual assistant app like Siri or Google Assistant, your phone must be always listening to respond to your questions and commands. Apple and Google claim that those apps only listen for that purpose, but other apps may also be listening. Review the microphone settings for all your apps. If you are really concerned, turn off your voice-activated assistant.
Do not respond to online quizzes or other online questions. They may seem like fun, but the purpose is to obtain personal information that may be used to target you.
Be careful with social media. Your social media posts and the posts you click are a prime source of information for advertisers and other profilers. Look at the settings in your social media platform(s) and limit access to your posts and your account. But remember that anything you click can probably be tracked and anything you post can probably be found.
Coping with Market Volatility: Cash Can Help Manage Your Mindset
Holding an appropriate amount of cash in a portfolio can be the financial equivalent of taking deep breaths to relax. It could enhance your ability to make thoughtful investment decisions instead of impulsive ones. Having a cash position coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.
That doesn’t mean you should convert your portfolio to cash. Selling during a down market locks in any investment losses, and a period of extreme market volatility can make it even more difficult to choose the right time to make a large-scale move. Watching the market move up after you’ve abandoned it can be almost as painful as watching the market go down. Finally, be mindful that cash may not keep pace with inflation over time; if you have long-term goals, you need to consider the impact of a major change on your ability to achieve them.
Having a cash cushion in your portfolio isn’t necessarily the same as having a financial cushion to help cover emergencies such as medical problems or a job loss. An appropriate asset allocation that takes into account your time horizon and risk tolerance may help you avoid having to sell stocks at an inopportune time to meet ordinary expenses.
Remember that we’re here to help and to answer any questions you may have.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
Coping with Market Volatility: Continuing to Invest May Help You Stay on Course
In the current market environment, the value of your holdings may be fluctuating widely — and it’s natural to feel tentative about further investment. But regularly adding to an account that’s designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, the bottom-line number on your statement might not be quite so discouraging. And a basic principle of investing is that buying during a down market may help your portfolio grow when the market turns upward again.
If you are investing a specific amount regularly regardless of fluctuating price levels (as in a typical workplace retirement plan), you are practicing dollar-cost averaging. Using this approach, you may be getting a bargain by continuing to buy when prices are down. However, you should consider your financial and psychological ability to continue purchases through periods of fluctuating price levels or economic distress; dollar-cost averaging loses much of its benefit if you stop just when prices are reduced. And it can’t guarantee a profit or protect against a loss.
If you can’t bring yourself to invest during this period of uncertainty, try not to let the volatility derail your savings program completely. If necessary, to help address your concerns, you could continue to save, but direct new savings into a cash-alternative investment until your comfort level rises. Though you might not be buying at a discount, you could be accumulating cash reserves that could be invested when you’re ready. The key is not to let short-term anxiety make you forget your long-term plan. I am here to help and to answer any questions you may have.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Stay Safe,
Joseph A. Smith, CPA/PFS, J.D., AEP®
Member
Prioritizing Savings for College and/or Retirement
The November 2018 AAII Journal, American Association of Individual Investors, included an interview with Harold Pollack. The discussion was about “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated” (Portfolio, 2016). He wrote it with Helaine Olen.
The following passage is from a response to a question about prioritizing where to direct money.
“There are different ways that people can do this. You should match your method with what gives you the mojo to actually do it.” … “Suppose I’m a young parent and I’m choosing between prioritizing my retirement and savings for my kid’s college. Mathematically, retirement tends to be the answer for most people, but your kid’s college gives you mojo in a different way. If you’re walking with your seven-year-old daughter in a store and you see a sweet $500 camera lens, you can point to it, and tell your daughter: “I really want that lens, I’m going to put that $500 toward paying for your college. Maybe some day you’ll do that for your daughter.’ That’s powerful and motivating.”
2018 Nov.Beyond-the-Index-Card-Implement
Correction Time: The Market Takes a Hit
After reaching all-time highs on January 26, 2018, the Dow Jones Industrial Average and the S&P 500 went into a two-week slide that saw both stock indexes drop by more than 10%, a decline that is typically considered a market correction.1
Analysts have been saying for several years that the long, booming bull market was overvalued and due for a correction, so the drop was not a surprise in the big picture.2 And even after the 10% plunge, the Dow was up 19% over the previous 12 months, and the S&P 500 was up 12.5%.3
It’s natural to be concerned about this kind of shift, but more important to maintain perspective and focus on your long-term goals. It may be helpful to consider some of the reasons behind the surge of market volatility.
Too Much of a Good Thing?
The initial trigger for the downturn was a better-than-expected jobs report on February 2, that helped drive the Dow down more than 2.5%, a significant decline considering the unusually low volatility in 2017 and the beginning of 2018. The economy added 200,000 jobs in January, marking the 88th straight month of job creation, the longest such run in U.S. history. Wages rose by 2.9% over the previous January, the highest year-over-year increase since the end of the recession in June 2009. And the unemployment rate held steady at 4.1% for the fourth straight month, the lowest level in 17 years.4
Although the report was great news for U.S. workers, on Wall Street the rosy jobs picture generated fears of higher inflation that might drive the Federal Reserve to raise interest rates more quickly than anticipated. At its December 2017 meeting, the Federal Open Market Committee signaled its intention to raise the benchmark federal funds rate three times in 2018, bringing it up to a range of 2.0% to 2.25%. Theoretically, these changes have been priced into the market, but the strong jobs report made it more likely that the Fed will follow through on its projection and possibly execute further increases if inflation heats up.5
Stocks, Bonds, and U.S. Debt
Higher interest rates rattle the stock market because investors are more likely to move assets out of risky stocks and into more stable bonds as fixed-income yields become more attractive. Higher rates not only mean increased yields on new bonds but also on existing bonds, as prices are pushed downward to make yields competitive. In addition, the prospect of inflation tends to push bond prices lower and yields higher, because inflation erodes the purchasing power of fixed-income payments.
One reason for the initial reaction to the January jobs report expanding into a full-blown correction is that bond yields were already rising due to other factors. The yield on the 10-year Treasury note — a bedrock of global financial markets — has been rising since tax legislation was proposed in the fall of 2017, and the yield reached a four-year high of 2.85% the day the jobs report was released.6-7 Although the Tax Cuts and Jobs Act was generally welcomed on Wall Street, bond traders have been concerned that increased Treasury sales to pay for the $1.5 trillion tax cuts will erode bond prices. This concern was exacerbated by the bipartisan budget deal that further increased deficit spending.8
The Treasury is working to finance higher debt at the same time the Federal Reserve is unwinding its recession-era bond-buying program. With the Fed reducing its bond portfolio, the Treasury must sell more bonds to the public to cover growing deficits. The Treasury recently announced the first increase in bond sales since 2009.9
The question is who will buy these bonds and what are they willing to pay for them? A weak dollar has made Treasuries less appealing to foreign governments, which hold more than 44% of U.S. government debt. With the Treasury market depending more on U.S. investors, supply may be outpacing demand — illustrated by a tepid Treasury auction on February 7.10
The Long View
Although mounting government debt is a serious concern, the stock and bond markets are both driven in the long term by the economy, and the United States looks to be hitting its stride after a long, slow recovery. The global economy, which has been even slower to recover, is coming back as well.
A correction may be disturbing, but it can strengthen the market in the long term by returning equity values to levels that are more in line with corporate earnings and less dependent on investor exuberance. A corrected market may also be less vulnerable to overreaction. On February 14, the Dow and the S&P 500 closed up more than 1.2%, despite a consumer report that showed higher-than-expected inflation. Even with higher prices in January, core inflation (which excludes food and energy prices) is running at only 1.8%, still below the Fed’s 2% target rate.11
Of course, no one can predict the future, and you might see volatility for some time. The wisest course may be to remain patient and avoid making portfolio decisions based on emotion.
The return and principal value of stocks and bonds fluctuate with changes in market conditions. Shares, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest.
The S&P 500 is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.
1, 3) Yahoo! Finance, 2018, Dow Jones Industrial Average and S&P 500 index for the period 2/8/2017 to 2/8/2018
2) Bloomberg, February 6, 2018
4-5) The Wall Street Journal, February 2, 2018
6) CNBC, January 11, 2018
7) CNNMoney, February 2, 2018
8) MarketWatch, February 12, 2018
9) Bloomberg, January 31, 2018
10) Bloomberg, February 7, 2018
11) MarketWatch, February 14, 2018
Perspective on February 5, 2018 Market Events
It looks like the U.S. stock market will finally get something that happens, on average, about once a year: a 10+% percent drop—the definition of a market correction. The last time this happened was a whopper—the Great Recession drop that caused U.S. stocks to drop more than 50%–so most people today probably think corrections are catastrophic. They aren’t. More typically, they last anywhere from 20 trading days (the 1997 correction, down 10.8%) to 104 days (the 2002-2003 correction, down 14.7%). Corrections are unnerving, but they’re a healthy part of the economy—for a couple of reasons.
Reason #1: Because corrections happen so frequently and are so unnerving to the average investor, they “force” the stock market to be more generous than alternative investments. People buy stocks at earnings multiples which are designed to generate average future returns considerably higher than, say, cash or municipal bonds—and investors require that “risk premium” (which is what economists call it) to get on that ride. If you’re going to take more risk, you should expect at least the opportunity to get considerably more reward.
Reason #2: The stock market roller coaster is too unsettling for some investors, who sell when they experience a market lurch. This gives long-term investors a valuable—and frequent—opportunity to buy stocks on sale. That, in turn, lowers the average cost of the stocks in your portfolio, which can be a boost to your long-term returns.
The current market downturn relates directly to the first reason, where you can see that bonds and stocks are always competing with each other. Monday’s 4.1% decline in the S&P 500 coincided with an equally-remarkable rise in the yields on U.S. Treasury bonds. Treasuries with a 10-year maturity are now providing yields of 2.85%–hardly generous, but well above the record lows that investors were getting just 18 months ago. People who believe they can get a decent, relatively risk-free return from bond investments are tempted to abandon the bumpy ride provided by stocks for a smoother course that involves clipping coupons. Bond rates go up and the very delicate supply/demand balance shifts, at least temporarily, in their direction, and you have the recipe for a stock market correction.
This provides us all with the opportunity to do an interesting exercise. It’s possible that the markets will drop further—perhaps even, as we saw during the Great Recession, much further. Or, as is more often the case, they may rebound after giving us a correction that stops short of a 20% downturn. The rebound could happen as early as tomorrow or some weeks or months from now as the correction plays out.
Once it’s over, no matter how long or hard the fall, you will hear people say that they predicted the extent of the drop. So now is a good time to ask yourself: do I know what’s going to happen tomorrow? Or next week? Or next month? Is this a good time to buy or sell? Does anybody seem to have a handle on what’s going to happen in the future?
Record your prediction, and any predictions you happen to run across, and pull them out a month or two from now.
Chances are, you’re like the rest of us. Whatever happens will come as a surprise, and then look blindingly obvious in hindsight. All we know is what has happened in the past. Today’s market drop is nothing more than a data point on a chart that doesn’t, alas, extend into the future.
Sources:
https://www.fool.com/knowledge-center/6-things-you-should-know-about-a-stock-market-corr.aspx
https://www.yardeni.com/pub/sp500corrbear.pdf
https://finance.yahoo.com/news/stocks-getting-smashed-143950261.html
Bob Veres
When investing should you follow your gut?
Jason Zweig’s Wall Street Journal March 18, 2016 article, “The Three Worst Words of Stock-Market Advice: Trust Your Gut” is insightful. The substance of the article is stated in a quote from Benjamin Graham’s book, “…The investor’s chief problem-and even his worst enemy-is likely to be himself.”
The article references research by “…finance professors William Goetzmann and Robert Shiller of Yale, along with Dasol Kim of Case Western Reserve University, have analyzed the Yale surveys and found that investors’ forecasts regularly look more like aftercasts—simple projections of the recent past into the future.”
“Prof. Shiller… has been surveying investors about their expectations since 1989.” One question is…What are the odds of a one-day crash of at least 12% in the U.S. stock market over the next six months? The probable answer was about 10 times the probability. “Remarkably, professional investors exaggerate the odds almost as badly as individual investors do.” “What’s more, the new study suggests, you probably should have put higher odds on an imminent crash back in January than you would now or would have six months or a year ago. That is partly because a sharp recent drop makes future declines seem more probable, and partly because the news media uses words like “crash” much more often after the market falls sharply.” “Naturally, investors tend to be complacent when they should be worried and afraid when they should be optimistic.”
“Words charged with negative emotion not only darken your view of the future, but they may make you feel that riskier investments have a lower—rather than a higher—potential return.”
“Dates like Oct. 28, 1929, and Oct. 19, 1987, when the Dow Jones Industrial Average fell 13% and 23% respectively, can “evoke a sense of doom,” says Prof. Goetzmann of Yale. ‘Crashes have a remarkably long life in the public imagination. Their echoes can last for decades’.”
Having a plan with a target allocation can help restrain reacting to your gut. This provides a map to achieve your financial goals. Your plan should be reviewed when your goals, priorities or circumstance change. You should review your investments periodically to see if they still fit the reason you chose the investment. There is not a consensus of how frequently you should review your plan and investments. Making changes too frequently is trading rather than investing. Very few are consistently successful at trading. There are costs and possible tax consequences when trading. Your plan should identify when the investment should be adjusted to meet your target (rebalancing). Set a percent or dollar amount of change that would justify rebalancing.
Generally rebalancing will increase the long-term performance. Waiting too long can reduce your returns.
Highlights from various articles of note
Target Date Funds:
An article by John Sullivan in the inaugural issue of “401k Specialist” discussed Target Date Funds (TDF). The article is based on a panel discussion at the 2015 Morningstar Investment Conference. Initially these funds were disappointing. One area of concern related to asset-class diversification. The question was not just about the ratio of stocks to bonds. The portion in domestic, foreign and alternative investments was also a concern. Another area requiring improvement was how the mix of assets changed over time and during retirement.
TDFs have improved since their introduction. Three companies account for 70% of the assets in these funds. At one point they accounted for 80%. Only one firm had funds (3) in the highest 10 performing funds. The other top performing TDF’s were from 2 other firms.
The greatest benefits of TDFs from my viewpoint is the improvement in investor behavior. “Investors are using them well. They don’t exhibit the typical behaviors of fear and greed with target date funds, and as a result stay the course and remain invested longer.”
Not all TDFs are the same. You want one that is consistent with your situation and your plan.
Retirement Planning Calculators:
This is the subject of a Wall Street Journal article, “New Study Questions Retirement Planning Calculators’ Accuracy.” This article was update online Feb. 22, 2016.
The article discusses an academic study of 36 retirement planning calculators. “… ‘in most cases, the available offerings are extremely misleading ‘ and generally not helpful to consumers trying to figure out if they will have enough money to cover their expenses for the rest of their lives.”
The study was based on “… a hypothetical couple in their late 50s earning $50,000 each and aiming to retire at ages 65 and 63.” The calculators were described as “…free and low-cost…” The cause of the misleading results was the limited amount of information used by the calculators.
“…the researchers identified a list of more than 20 factors they believe should be included…”
Do not use the simplest calculator available. Pick one that has many questions. Also review the assumptions they are using. All calculators are use assumptions. Some assumptions to all calculators are: life expectancy, health, inflation rates, investment returns. Other questions would include the amount of your current investments and amounts you are currently savings.
