A Reminder About Requesting Withdrawals

In case you missed our last newsletter, we want to make sure you are aware of a new policy related to withdrawals from your accounts at TD Ameritrade. Due to an increased threat of electronic fraud, we are now required to obtain verbal authorization to initiate withdrawals from your accounts. You can still email the details of your instructions, but if you do so please also follow up with a phone call. You can confirm your request with any of us – Jonathan, Irina, or Jason – and if we are not available a voicemail confirmation is sufficient. We apologize for any inconvenience this extra step may cause and we appreciate your understanding as we continue to ensure the security of your accounts.

Is Now the Time to Refinance Your Mortgage?

With mortgage rates at or near all-time lows, many of you may have considered refinancing your mortgage. And if you haven’t considered it, we would strongly encourage you to do so. Of course, refinancing isn’t appropriate for everyone but there are often a number of benefits for many people, including:

  • Locking in a low interest rate
  • Reducing monthly payments
  • Freeing up cash flow to save for retirement, pay down high-interest debt, or fund hobbies
  • Cashing out some of the built-up equity to use for home renovations, investments, or other purposes

As with most financial decisions, there are a lot of details to consider when choosing the right course of action. We have helped many of our clients make the complicated choice of whether or not to refinance, and we would be happy to discuss with you whether it makes sense in your particular situation.

There is No Such Thing as a “Best Investment for Most People to Buy”

By Irina Pack

An article published in the USA Today titled “Warren Buffett: This is the best investment most people can buy” was forwarded my way recently. I find it interesting to read statements attributed to Warren Buffet, even if the journalists covering them sometimes rephrase or take things out of context.  Judging by the quotes in the article, all Warren actually asserted was that the Vanguard 500 Index fund is a great choice if you are looking for passive exposure to the “American industry” as a whole – which is not the same thing as the best investment for most people to buy as the journalist stated.

And here are a few reasons why Warren Buffett or anyone else with a moral compass and a finance background would not and should not make such a statement:

  • There is no such thing as a best investment for most people because people have different investment goals, risk tolerances, investment horizons, tax considerations, liquidity needs, etc.
  • Volatility. Not everyone would be able to stomach the -37% drop the fund experienced in 2008. And if one had to withdraw money for expenses or required minimum distributions that year (as retirees typically do), he or she would have certainly captured the losses.
  • Knowing when to buy is just as important as, if not more important than, what to buy.  Given the current environment (high P/E ratios, high volatility, presidential year, and possibility of a recession), even I, with my pretty high risk tolerance, would not plunk down my money for an S&P 500 fund right now. No one can predict when the market is at its lowest point, but putting one’s entire wealth into the American industry at a time when the market is priced at an all-time high even though the S&P 500 companies are expected to post shrinking earnings for a fifth straight quarter would not be wise.

So, while the bad news is that there is no best investment for most people, the good news is that we here at Journey Tree realize that and are committed to making investment decisions that are in each of our clients’ best interests and consistent with their goals, risk tolerances, investment horizons and needs.

The Rollercoaster Returns

Over the last month or so, stock markets have tacked on another 2-3% gain. This rise came on the heels of an abrupt 6% drop in the market immediately after the surprising vote in Britain to leave the European Union. What is going on?

Volatility has returned to the markets in the last year after several years of positive market action, as shown in this five-year chart of the New York Stock Exchange Index.  Cited causes of recent market declines include an economic slowdown in China, huge losses in the oil industry, and geopolitical events such August Newsletter Chartas “Brexit.”

Yet why does the stock market keep bouncing back? It appears to be a tug of war between a range of concerns (such as slowing growth and debt problems in China, fear that the European Union will break up, the possibility of rising interest rates, and declining earnings for U.S. companies) and the need for investors worldwide to put their money to work in the best place they can.

Amidst a continuing global economic slowdown, the U.S. looks to many like “the best house in a bad neighborhood.” It is likely that after recent market drops foreign investors jumped in to buy stocks, producing the unusually quick rallies in prices we have seen over the last year.

Despite recent all-time highs for some U.S. stock indices, other indices are still below their peaks of a few years ago.  Many stocks have been flat or down for over two years.

Market gyrations aside, stock prices remain very high from an historical perspective leaving scant room for much upside. With this caution in mind we continue to have a lower allocation to stocks than usual and are prepared to move money into stocks as prices become more attractive.

All in all, it has been a modestly positive year for Journey Tree accounts so far in 2016, thanks to strong performance from our roster of closed-end income funds and decent returns from our core stock and bond funds. That said, significant future returns are likely to be hard to come by until stocks get cheaper and interest rates rise again.

Wild First Quarter Ride

It was a wild ride in the stock market during the first 3 months of the year. January started out with one of the biggest drops ever for the month. The market continued to decline into mid-February reaching about a -10% decline for the year at that point before essentially recovering all the ground it had lost by the end of March. European and Asian stock markets were down about -2.5% on average for the quarter and U.S. and overseas bonds were generally up between 1% and 2.5%. Since the end of March, the U.S. market has edged up slightly.

While the U.S. economy has continued to show some improvement there remain a number of areas of concern. Most pertinent to the stock market is the trend of lower corporate earnings over the last two years. Earnings were down -0.6% in 2014 and down -5.1% in 2015. And those lower earnings numbers may actually be overstated due to financial engineering by companies as well as companies buying back their own stock. The result is that – with the recent gains in stock prices –  the S&P 500 index is priced about 20% above the average price-to-earnings ratio for the last 10 years. This all makes stocks a less desirable investment option at current prices.

Picture3“The S&P may have 2% of upside and 20% of downside. The setup for risk assets (such as stocks) from a risk-reward perspective is quite poor.”

– Jeffrey Gundlach, Doubleline Funds

Stocks have enjoyed tremendous tailwinds such as record-low borrowing costs, low wages, significant merger and acquisition activity, record margin debt used to buy stock, and corporate stock buybacks. Many of these tailwinds are abating or even becoming headwinds. For instance, after the Federal Reserve raised interest rates for the first time in almost 10 years in December, the stock market dropped considerably until its mid-February turn around. And one likely reason for the turnaround was the Federal Reserve backing away from additional rate increases for the time being.

Low interest rates have provided significant support for stock price increases over the last 7 years. But if earnings continue declining, low rates won’t be enough.