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Founder's Notes 

November 25, 2014 

 

Welcome!  
to my "Founders Notes", a weekly newsletter filled with tips and updates from me and the latest thoughts from members of the ARD team. 
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John R. Deitrick, CFP� 

History of Thanksgiving 
Courtesy of HistoryofHolidays.com 

The history of Thanksgiving in the United States begins with the pilgrims who came
over from England and landed on Plymouth Rock in Massachusetts in 1621. The pilgrims shared a feast in the fall time, probably October, of that year with the Wampanoag Indians.

Although this was technically the first Thanksgiving, Thanksgiving would not become an annual event until many years later and would not become a federal holiday until 1941. In addition, many of the traditions like turkey and pie that we associate with Thanksgiving
did not occur at the first Thanksgiving, instead evolving over many years. It took a very long time for Thanksgiving to become an annual event, for it to have a universally
accepted date, and for it to be celebrated as a federal holiday.

 No Founder's Notes December 3rd due to the Thanksgiving Holiday
 

Thought for the Week:

Volatility Does Not Measure Risk

SYNOPSIS

  • Volatility is a measure of emotion in markets,and investors are forced to navigate the numerous "emotional traps" that exist on a daily basis.
  • Arguably the most dangerous emotional trap is panic selling because it converts a paper loss into a real loss. 
  • Extending a holding period is one of the most effective and low risk strategies to reduce portfolio volatility without sacrificing your overall return. 

Emotional Traps


Volatility is driven by emotions, primarily fear and greed, and rarely do changes in fundamentals impact prices in a single day or week. Instead, relevant trends develop over time so the constant movements of prices in a portfolio on a daily basis tell an investor next to nothing about the actual risk in his/her portfolio.

 

Since volatility is nothing more than a measure of emotion, volatility spikes are actually nothing more than emotional spikes. Investors must do their best to avoid the "emotional traps" that come with these spikes, which is admittedly much easier said than done when it's your retirement on the line.

 

Arguably the most dangerous of these emotional traps is panic selling, because it's the worst possible outcome for the investor. Not only were they forced to endure the pain of sleepless nights while watching their portfolio get whipsawed, they then make the damage permanent by locking in a loss.

 

The most effective strategy to avoid emotional traps is to try to eliminate as much emotion from the investment process as possible. First, we need to become comfortable with the concept of volatility, what it really represents, and accept the fact that it very rarely causes a market to crash.

 

The chart below shows the number of big dips in the S&P 500 since 1950, along with the average size of the drop and frequency of big dips (aka "crashes").  

Source: www.awealthofcommonsense.com

These numbers may appear frightening upon first glance, but let's consider the following three key conclusions: 

  1. Corrections Do Happen: The S&P 500 has experienced 28 dips greater than 10% since 1950, which equates to an average of one every 20 months. However, half occurred in the1970s and 2000s (both bear market decades), meaning corrections occur far less frequent when we are in a bull market decade. We actually saw just one correction in the 1990s (the last bull market decade).
  2. Losses Don't Last: The average recovery time from a correction was less than eight months. Paper losses rarely persist for more than a year and highlight the inherent dangers within panic selling.
  3. Large Losses are the Exception: The S&P 500 has only seen five drops greater than 30% in 65 years, or roughly once every 13 years. Furthermore, more than two-thirds of corrections fail to develop into a 20% or more loss. 

The net result of our analysis is that investors lose money when they assume that the market is crashing every time it falls. The reality is that crashes are very rare, and when they do occur they usually persist for a short period of time.

 

Said another way, panic selling, not volatility is the reason why investors lose money when the market dips.

 

A Cure for the Common Volatility

 

Luckily there is a very simple and easy approach to reducing the volatility in a portfolio. The chart and table below show the volatility in the S&P 500 for a 1-year, 5-year, 10-year, and 20-year holding period going back to 1926.   

 

These data points may appear confusing at first so let's walk through the results to develop a clearer picture. The bars in the chart show the size of the distribution of returns based on a holding period from the maximum possible return in any given holding period to the lowest possible return.

 

For example, if an investor were to have a 1-year holding period, then the largest return possible would have been 56.5%, and the largest loss would have been -45.2%. By extending a holding period to 5 years or longer, the dispersion falls, which leads us to three very important conclusions.   

  1. Time Matters: Notice how the maximum possible return is cut in half when an investor goes from a 1-year holding period to a 5-year, but more importantly, the minimum return is one-third of the 1-year holding period. Meaning, a longer holding period has a larger and more favorable impact to the loss potential to a portfolio.
  2. Losses Evaporate: The worst possible return that an investor could have realized in any 10-year holding period since 1926 was -1.6%. More encouraging, there has never been a 20-year holding period that has lost money in the S&P 500.
  3. Constant Returns: The green dot indicates the average annual return for each holding period, which is practically unchanged at 10% during each period. The long-term average for equities is not impacted by its holding period, so investors do not risk lower average returns by staying invested longer (a fancy way of saying that equities continue to rise over the long run).
The net result of these findings is that a longer holding period will dramatically reduce volatility in a portfolio without impacting the long-term average return. Therefore, the most effective strategy to reduce volatility in a portfolio without sacrificing returns is to ignore emotional traps and remain invested.

 

NOTE: These examples pertain to the broader market, but the conclusions can be applied to most equity strategies. Meaning, those investors that try to time mutual fund buys and sells are falling into the same emotional trap as those who try to time markets using index funds.

 

Implications for Investors

 

Memorize the following statement: "Volatility Does Not Measure Risk."

 

Say it over and over again. Tell your loved ones. Tell your neighbors. Make this concept a way of life so when the next time we see a surge in volatility, you can remind yourself that volatility spikes are nothing more than emotional spikes.

 

An economy does not fall into a recession overnight, and a company does not lose their competitive positioning before noon on a random Tuesday (only to re-acquire it back by 9:30 am the very next day). These emotional traps are an unfortunate reality in markets, so the best way to navigate them is to ignore them.

 

It's also important to understand that there are times to sell equities and become defensive. However, I continue to believe that the risk of a U.S. recession is low, and U.S. equities remain fairly valued with very few signs of bubbles forming.

 

Therefore, until our economic environment changes, I welcome these volatility spikes because our investment strategy is predicated upon profiting from the fear and panic of others.

 

The bottom line is that the absolute best way to avoid falling into these emotional traps is to keep a long-term focus and ignore the daily swings in equities. Volatility and risk are two completely different concepts, and we urge investors to focus solely on managing the risk while ignoring the volatility.


 

  

This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.  

Introducing: Tamila Lavender 
One of Our Subject Matter Experts
Medicare Open Enrollment Deadline December 7th


    Account Executive

Quality Care With Every Plan

Group * Individual * Medicare

Are your prescriptions no longer covered?  

Is your doctor no longer in the network?

Are you paying too much for your plan?

What changes may be on the horizon?

Has Your Medicare plan changed or been cancelled?

 

Tamila is an independent insurance specialist focusing on 60 years of age and over, Medicare Supplement, Advantage Plans, Individual and Small Group Insurance.

Advanced Retirement Design is offering dates and times for the families we serve and their friends to meet with Tamila at our office to answer any questions you may have. 

Please contact Advanced Retirement Design at 
614-602-6506 to schedule a date and time to meet with Tamila on or before December 7th. 

Need Help?
Too many tasks and too little time?
I can Help! 

Tonya Bahner 
Professional Errand Girl
614-588-2774
 

When the going gets tough, call me!

Light housekeeping, shopping, meals, de-clutter, laundry, errands, pet sit and walk, collect mail, yard work and more!
 
Call me today to help!
614-588-2774

 

The specific products or services described in this section of the newsletter are neither offered through or recommended by Global Financial Private Capital, LLC., an SEC Registered Investment Adviser. 

Please Contact Us:


 

I hope you find this information adds value. If you would like to talk to John regarding these, or any other financial concerns, please feel free to call us at (614) 602-6506 and we will be happy to schedule a visit.
 
Have a great week!  Enjoy His gift of today!

 

Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital. 
 
 

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP�, CERTIFIED FINANCIAL PLANNER™ and the federally registered CFP (with flame design) in the US., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

In This Issue
Article Headline: History of Thanksgiving
Article Headline: Dublin Wind Symphony Christmas Concert
Thought for the Week: Volatility Does Not Measure Risk
Article Headline: Medicare Open Enrollment Deadline December 7th
Anyone Out There Looking for Help??



John R. Deitrick,

CFP�,

  Founder

 

Advanced Retirement Design, LLC
 
7263 Sawmill Rd. Suite 150
Dublin, OH 43016
 
 ph: 614-602-6506
fax: 614-259-6094 
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