15 Minutes of Fame

The competition for popularity, attention, and eyeballs is a way of life in the public sphere and always has been. The advent of personal branding has only put the “look at me” phenomenon on steroids. It has never been easier for a meteoric rise to take place in pop culture, politics, or business considering how quickly we can adopt the next big thing over social media. Andy Warhol may have been right about 15 minutes of fame, but he may not have expected it to take 10 minutes to get there.

This is the first of two notes about popularity and how it applies to high profile fields: Politics and Investing.  Today, I will start with a comment on the biggest popularity contest that is taking shape now: the 2020 Presidential Election. Recently, 20 candidates took the stage for the Democratic primary debates and we are all trying to predict what this means for the election 16 months from now. Popularity can be fickle, we should be cautious in drawing conclusions too soon.

One of the best popularity barometers in the last several decades is, of course, Saturday Night Live.  One of my favorite political skits ever on the show is from November of 1991 entitled, Campaign ’92: The Race to Avoid Being the Guy Who Loses to Bush.  The bit was such a unique snapshot in time because it was both funny and way-off in its reading of the political future. It features a debate between five potential Democratic presidential nominees trying not to be the “chump” who would lose to a very popular George H.W. Bush in 1992. The incumbent was riding a wave of popularity in the aftermath of the Persian Gulf War and was seen as an inevitable two-term president.  Not to be.  Here are some interesting points from the skit:

  • The joke is that no one wants to be the one to lose, so they won’t run. Best quote: “I have mob ties” -Mario Cuomo (Played by Phil Hartman).
  • It was filmed only 12 months from the general election and no one had clarity on who any of the front runner(s) were.
  • The issue that would decide the election, the economy, did not come up.
  • The eventual winner, one of the most significant political figures of the next 30 years (Bill Clinton) was not on the stage or mentioned at all.

It is hard to predict election outcomes, as we were all reminded in 2016 with both the U.S presidential election and Brexit.  This is even harder when the candidate pool is as large as it is early in the game. The real epiphany is that sometimes, like in 1992, we can’t even predict the issues that will end up being decisive in the near term.  Can’t pick the candidates. Can’t pick the issues. Can’t pick the winner. The only thing we know for sure is who is popular in the moment. That’s pretty shaky ground.

Investing based on which party or candidate will win is challenging because the conditions on inauguration day often dictate more of a President’s agenda than campaign speeches.  For example, when Barack Obama declared his candidacy in 2007, the U.S. economy was still 7 months away from the Great Recession that would define many of the early policy decisions of his administration. The market results for a President will come from a combination of their policies and the cards that they are dealt.

In elections, the vote only counts once, unlike the markets where the voting system operates each day.  We can buy today and sell tomorrow if we like.  This makes political outcomes hard to predict because voting is akin to a popularity snapshot.  It is important to stay informed of the candidates’ issues and attributes, but be mindful that popular opinion can sometimes overwhelm the fundamentals. More on fundamentals and popularity when we talk investing next week….

June Market Note- Managing Expectations

In the last month, stock markets around the world have been adjusting expectations.  Expectations about the future are important because often it is not a matter of economies being good or bad that drives shares higher. Of greater concern is whether the economy is getting better or worse.  The U.S. economy growing at 2% instead of 3% is still growth, just at a slower pace.  That expectation of a slower pace is what drove May’s sell-off.  The global economy is growing, but more slowly if trade negotiations lead to higher tariffs and Brexit continues its rudderless course.

Adjusting expectations lower has meant stock market declines, but that has also created a flight to safety.  Bond yields have dropped steeply in recent months, which means that investors have been rewarded for keeping high quality bonds as ballast.  The low returns that we saw on fixed income through the first few months of the year felt reassuring as bonds rallied into the stock sell-off.  Here were the monthly total returns on some of the major indices:

S&P 500: -5.65%

MSCI All Country World Index: -5.92%

Barclays US Aggregate Bond Index: 1.75%

It is always a valid question to ask whether a bad week, of month, or quarter should call into question the way that you are invested.  In reality, the good businesses that you invest in have to operate every day in an uncertain environment as existed in May.  Howard Marks, in his book Mastering the Market Cycle, describes how businesses have to face unpredictable conditions much like a hitter in a baseball game.  A Hall of Fame hitter with a .300 lifetime average still failed to get a base hit 7 out of ten times to the plate.  A hitter of that caliber was capable of greatness in every at-bat, but forces out of his control were also at play.  Here are some of the factors that hurt a hitter’s consistency, according to Marks:  His health, the weather, stadium lights, the crowd, the game situation, the quality of pitches, his guess of the next pitch, his diet that morning, his bed time the night before.  In a vacuum he might hit a home run every trip to the plate, but no at-bat ever takes place in a vacuum.

We are watching trade negotiations and interest rates very closely, but they too are operating in a complex environment with many factors at play.  If trade issues were magically resolved tomorrow, we would still wonder how that affects the Federal Reserve, for example.  Every diversified portfolio is designed to weather multiple events and developments.  Our job as investors is to not become so consumed with one story that we lose our appreciation for complex economies.

Here some interesting pieces related to expectations that caught our attention in the last month:

Uber and the expectations of an IPO

Inflation has been dormant, but are our expectations too low?

Churchill: Walking with Destiny.  My recent book project…Managing the expectations of a nation at war when nothing is certain.


A Moving Target: Thoughts on Target Date Funds

The Wall Street Journal ran a feature recently on the popular target date funds that are often found as an investment option inside of retirement plans. These funds are designed to manage risk based on the age that investor plans to retire, typically in five year increments (2020, 2025, etc.).  The use of these funds has grown tremendously in the last decade because they are now the default investment if someone does not actively elect an investment choice.  This was done so that plan participants wouldn’t sit idly in cash and miss out on return potential.  That is a noble concept, but as the Journal points out, target date funds have some quirks that are worth understanding especially for those who are approaching retirement.  If you have the option to own these funds in your 401(k), here are some things you should know (we use the Vanguard Target Date 2020 fund as an example)*:

  • They are designed as a Funds of Funds. The Vanguard 2020 fund has five different funds inside of it, each representing part of the stock or bond market.  To assess how the fund is invested, we need to look inside to see what the underlying holdings are.  The balance between different kinds of a stocks and bonds can have an impact on performance.
  • Be careful with comparing performance. Because they are made up of different assets, target date funds should not be compared to an all stock index like the S&P 500.   Over the last decade, a 2020 fund would lag behind a U.S. stock index because it has bonds and international stocks (20% International in our example) that have not performed as well.  2020 funds should be compared to similar funds based on cost, holdings and long-term strategy.
  • They are riskier than you might think. That could be a good thing, though.  The year of retirement is not a finish line as we all hope to live long lives beyond then, and target date funds take that into account.  Since there is a need to grow over what could be 20+ year of retirement, many funds will still have a sizeable portion in stocks well past the retirement year.  In Vanguard 2020, there is over 50% in stocks for investors retiring next year.  That might come as a surprise to someone who thought they were going to be very conservatively positioned by this stage.
  • They are a good accumulation tool, but a blunt instrument for retirement planning. For people whose retirement horizon is far off, target date funds are a simple strategy that ensures diversification.  Once the retirement situation becomes clear, the investments need to be more tailored than target funds allow.  Two people retiring in the same year are going to have very different risk profiles and income needs.  Odds are they need to invest differently based on the circumstances of their plan.

Target date funds have improved the investor experience in retirement plans but they run the risk of breeding complacency as retirement approaches.  As with any investment, it is important to know both what you own and why you own it.  A financial plan should tell us investor how much income and growth is needed in retirement and with that knowledge we can decide when a target date fund might no longer be a fit.


*Source: YCharts.  Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Vanguard for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
This information is intended to be educational and is not tailored to the investment needs of any specific investor. Investments in target date retirement funds are subject to the risks of their underlying funds. The investment risk of each target date fund changes over time as its asset allocation changes. That is, the fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date. These risks are subject to the asset allocation decisions of the Investment Adviser. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. These fund suggestions are based on an estimated retirement age of approximately 65. Should you choose to retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your particular situation. All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.

The Found Decade

The first decade of the 21st century has been called a “Lost Decade” for investors because during that time the U.S. stock market went through two bear markets before ending up flat for the ten-year period.  This month marks the anniversary of a robust rebound, a regression to the mean, or a “Found Decade.”  In early March 2009 the financial crisis hit its bottom, at least as far as the stock market was concerned.  From that time until March 7, 2019, the total return of the S&P 500 has been 408%. 

These two contrasting periods have me thinking about a question that faces investors when they look to invest in a fund or index:  How do I select the right fund?  The obvious answer might be to look at its past performance, but that can be deceiving.  In the scenario I just mentioned, in March of 2009 the Vanguard Total Stock Market Index Fund had returned an abysmal -32% over the ten years prior.  This assumed you had invested into the heights of dot-com mania and held into the troughs of bad mortgage debt.  The trailing returns were terrible, but did that make it a bad investment?  By contrast, over the same time period, the Vanguard Total Bond Market Index grew over 70%.  Did that make it a better investment in March of 2009?

No.  Because that is making forward decision with a focus on the rear-view mirror.  What we can learn from this chart is that during a period where stocks left much to be desired, bonds did their job.  They preserved principal and paid income steadily.  An investor in 2009 had a choice to make, though.  Do the  last ten years tell me anything decisive about the years to come?  Here is the chart of the next ten years for stocks and bonds:

Bond performance has been positive, and reasonable, but stocks have been on a meteoric run for ten years.  So many people lost faith at the lows, sold their stocks, and missed out on the years to come. This tells us some very important things about making decisions on past performance:

  • Past performance, while interesting to look at, is as out of our control as the future.
  • The past can’t tell us how an investment will perform in the future, but it can tell us what is possible.  Stocks can be volatile.  Bonds can underperform in a bull market.  Behave accordingly.
  • Market cycles can last a long, long time.  Patience can be tested, but that is why investing is a “get rich slowly” exercise.

I bring all of this to the foreground because rest assured, there will be mutual funds and investment managers touting their performance over the last ten years hoping that we investors will make decisions based on this advantageous snapshot.  Instead of focusing on trailing returns, you should instead weigh these aspects of an investment:

  • Cost
  • Comparison to similar assets
  • Risk levels

None of them will predict your returns, but these three features are in an investment manager’s control. Not so with the performance of the markets.  Be wary of looking backwards, you may miss the opportunity to come.

Contact Dennis

Important Disclosures

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