Thinking about the stock market

Time does matter

How’s your algebra?  You know . . .  x + y = z.  If you know one factor, you know a bit but cannot solve the equation.  If you know two, you can probably figure out everything about it. Apparently, the news media and many investors believe that this is all there is to figuring out the stock or bond market. Pundits are prone to reduce their explanation of the markets in just such simple terms.  I probably should just let it go, but I continue to be confounded by the way, at the end of the day, the media explains how that day’s events have shaped the market. I understand that we human beings have a strong and undeniable desire to establish a cause-and-effect relationship between two things especially when we perceive that one affects our life. For example, we truly want to believe that what goes on in Washington or somewhere else around the world will help make sense of the daily gyrations of the financial markets. True news flash: the markets are much more random than that. The truth is that in the short-term, certainly in a period of less than a year, political, fundamental, and even economic data have very little to say about what goes on in the market from one day to the next.  There are exceptions, but they are rare.

Part of this conundrum is grounded in our perception of time, or perhaps the lack of a clear perception of market time. Dr. Alexander Elder cautions that the we need to first become aware that market time is much slower than our own.  When they hear the daily news, I fear that few people stop to consider that the market moves in multiple time-frames.  It moves simultaneously over years, months, weeks, days, and even hours and minutes–often in contradictory directions from one time frame to another.  The trend of the market may be up on a monthly and weekly basis, but down today. Or vice-versa.

What the news commentators miss is the context of the daily moves as they play out in longer time frames.  I believe that one should start with a longer view to gain strategic perspective, and then analyze a shorter time frame to figure out what you are going to do within it.

Many advisors will coach their clients toward becoming a long term investor–with a view toward years. One has to ask what “long term” really means.  Usually to the advisor it is an admonition to be patient with what can become severe drawdowns. The chief advantage of the long term view is that it eliminates the need to pay attention to the daily news. Because the markets have a bias to increase over long time periods, you could see rather large gains over long periods of time–but not always.

At the other end of the time spectrum is the day-trader.  Actually the title is a misnomer because a true day-trader has an expected duration of holding an investment measured in minutes or hours, not even an entire day.  Most day-traders end the trading day in cash. The folks who do this see many opportunities, because the market can move up and down very quickly. However, trading costs can mount up and eat away at return. It also requires a vigilance and dedication to investing that few people can maintain.

A middle ground is what the investing industry calls swing-trading.  The expected duration of a holding using this time perspective is usually days or weeks.  There are lots of opportunities offered to the swing trader, and he or she can match the opportunities with reasonable risk controls. The downside to this type of trading is that you can easily miss big trends by getting in too late and / or out too soon. It is possible to produce outstanding returns using a trading strategy, but that depends on the quality of  your trading system.

One step in goal-setting is to have a proper time dimension for each of your goals. Consider the goals of your investing and match the time-frame of your investing with the goal. For most people, this will mean tuning out the daily market report. But if you do listen to it, be sure to stop and place it in the proper context. It is also vitally important to consider the time-frame when you look at quarterly reports or monthly statements from the custodian of your funds.  Too many investors tend to make knee-jerk reactions based on a time-frame that is totally disconnected from their true investing goals.

Leave me a comment or question. I would love to know your thoughts on this.

How to Set “SMARTER” Goals

Achieve More NOW

As financial planners we spend a lot of time helping our clients set goals and reduce them to writing. In fact, that is one of the standards of professional conduct imposed by the Certified Financial Planners Board of Standards.  Nearly every client comes to us with a long range goal in mind i.e. retire with enough to live on into old age, pay for college, get out of debt, etc. We have to pause to ask if the goals well-defined?  Usually they aren’t.

In order to become better equipped to help our clients set goals, I attended Michael Hyatt’s Best Year Ever Live Event earlier this year and have subsequently participated in his Activation Workshops to build on that experience.  I just returned from the second of those workshops designed to assess progress made in the quarter just ended and to refine the goals for next quarter.  In the program, Michael presented a method of “How to Set Goals” and has graciously granted me permission to share the method with you here. You can learn more about Michael and his work at

Step #1: Select a life domain.  Ask yourself, where do I want to make progress?  These could be in the realm of Being (spiritual, intellectual, emotional, physical); Relating (marital, parental, social); or Doing (vocational, avocational, financial).

Step #2: State an aspiration.  An aspiration is simply an expression of a desire. Usually it starts with the words, “I want . . .”  Unfortunately, we see many clients starting and stopping at this point and the goal remains simply a wish. Aspirations are important in that our best goals tap into our deepest desires, but stopping here cuts the legs out from under our goals. As financial planners, we listen for critiques that each client places on his or her own financial management for clues related to finding the aspirations.

Step #3: Decide if it is an Achievement or a Habit Goal.  Achievement goals have a well-defined target that will be easily measured when you get there. Retire at age x.  Accumulate $x by age y. We usually default to achievement goals but we really need to ask whether a habit goal will best serve the outcome we desire. A habit goal is used when the aspiration is rather vague and / or hard to measure.  A habit goal can often become a means to accomplishing an achievement goal.  For example, one of my goals is to remain healthy–an achievement goal that will elude me if I don’t have a good habit of exercising every day and getting 7 – 8 hours of sleep each night.  So one of my 2017 habit goals is “Exercise 30 minutes a day, 5 days a week beginning on January 23, 2017, for 26 weeks.” (I figured it would take that long to establish it as a habit given my reluctance to exercise.) Another is “Get to bed at a time that will provide 7 hours of sleep each night starting on January 23, 2017 for 13 weeks.”  I was able to mark these off this quarter because those habits are now firmly installed.

Step #4: Understand the characteristics of each type.  Michael has developed his own variation of the SMART goal (I learned SMART goals 40 years ago in the Army).  He has suggested that both Habit and Achievement Goals need to be SMARTER:  Specific, Measurable, Actionable, Risky, Time-Keyed, Exciting, and Relevant.  “Risky?” you might ask.  He advises that our goals should be in our discomfort zone if we are to make significant progress in the chosen area of life. Our job as financial planners is often to help clients stay out of their delusional zone.  Notice that achievement goals and habit goals have different time-keys.  Achievement goals have a deadline whereas habit goals have a start date, habit frequency, time trigger, and streak target.

Step #5: Write the goal using the appropriate template.  Start with a verb (action), include the words that make it specific, measurable, risky and exciting, and end with by _________________ (the date).  An example would be Retire with no reduction in living standard by age 65.   A habit goal will also begin with a verb (the action) followed by the terms that make it measurable, risky, exciting, and specific. which are in turn followed by the habit frequency , time trigger, starting date and streak target.  An example might be Exercise (the action) every morning for at least 30 minutes, 5 days a week, (the measureable and exciting part) starting on July 18, (start date) for 26 weeks (the streak length which is the time that I think it will take to install the habit).

Often our financial planning recommendations are actually the short term goals that will lead toward the accomplishment of long term goals. For example, the planner might calculate and advise the client to spend not more than $X in order to reach the long term goal of retirement at a certain age.

If you haven’t set your goals using such framework, perhaps your next goal should be “Write my goals using a SMARTER framework by the end of this month.  Drop down and leave a comment or question.

July 18, 2017



News or noise?

Time to focus on what matters

The steady diet of headlines pouring out of Washington has been unsettling for many Americans, regardless of where they sit on the political spectrum.  Even Lloyd Blankfein, CEO of Goldman Sachs, jumped into the fray and wrote his first ever tweet criticizing President Donald Trump’s move to withdraw the U.S. from the Paris climate change agreement.  One has to ask whether he is truly interested in the environment, just wants to compete with Trump, or if GS holds a lot of Twitter stock, beaten down lately.

We all know that equity markets (stocks) hate heightened uncertainty. What is happening in Washington is generating an enormous amount of political uncertainty.  Even the word “impeachment” has been bandied about in conventional circles. Some pointed to that “news” to explain the one-day sell-off that caused the DOW to drop 373 points, last month.

But, political as well as international uncertainty has yet to translate into Main Street economic risk. It is here that you and I live.  To assess Main Street economic risk, we look at GDP (both nominal and real), household income, consumption, and nonresidential fixed investment. The standard deviation of those elements is a measure of economic risk.

According to Dr. Woody Brock, economic risk has decreased by well over 80% during the eight decades since 1930. Indeed, there was a spike in the ’00 decade, 2000-09. But so far each of the metrics, with the exception of household income, has shown a decrease in volatility (a standard measurement of risk) this decade. The economy has improved, from a riskiness standpoint.

Many will posit that the fundamentals of the economy, extrapolated from the news, drive the market. If that were the case, one could reasonably expect that the risk of the market would have also declined by more than 80% over those same decades. That simply hasn’t been the case. In that same period there has been only a 20% decline in market volatility (a standard measurement of risk).

Much will be said about the economy improving and that will likely be given as the reason for this or that happening in the market.  In reality, it is very difficult for anyone, including professionals, to make correct investment calls based on the news. That’s because mistakes in interpreting the news are rampant.

Remember when nearly everyone believed that house prices almost always go up and almost never drop. Furthermore, the price paid for a house didn’t really matter.  That led to overshoot of the price and the ultimate bursting of the bubble. We all now know that that belief, so widely held by investors, was a mistake. The news, in my opinion, represents mere noise.  Today, we must concern ourselves with the prevailing stories that may turn out to be wrong.

So what should we be concerned about today?  A possible list includes:

  1. Excessive debt levels. Margin debt is at a record high and student loan debt now exceeds other forms of debt.
  2. Increasing levels of pricing model uncertainty.  Discerning the true value of an investment today is quite different than it was a few years ago before the advent of today’s large, hi-tech companies.

Despite the frequent distractions from the popular press, we are keeping a firm eye on the market fundamentals, as well as the technical signals to navigate through these uncertain times. You might want to turn off the TV and enjoy your weekend and summer.

June 2, 2017