Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Why Should We Invest Internationally?

Dennis Covington was recently featured in a video series where advisors answer common client questions.

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Britain's Exit from EU

July 2016

You’ve heard us say before that “markets don’t like uncertainty”. Events that create uncertainty invariably lead equity markets to trade lower in the short term and Britain’s exit (Brexit) from the Europe Union (EU) definitely qualifies as that type of an event.

The uncertainty created by Brexit creates some very basic questions:
• How long will the uncertainty last?
• How will it impact trading around the globe?
• Will other countries exit the EU?
• How will it impact the global economy?

Brexit will require the U.K. to renegotiate their trade agreements with other countries. History shows this will take years to complete. In 1973, Britain first joined the predecessor organization to the EU, the European Communities. In 1979, the European Monetary System was launched. In 1993, the Treaty on the European Union was signed. The Euro currency was launched in 1999, but most countries didn’t replace their national currencies with the Euro until 2002. Great Britain never adopted the Euro.

In the short run, we can expect more day-to-day volatility of stock prices, as well as currencies, which can particularly impact the international stocks we all own. We can definitely count on the financial press to exploit this new “crisis” with breaking news alerts and special reports aimed at driving up ratings.

When events like this happen, we find it helpful to think about the companies that make up “the market”, rather than just “the market” itself.
• Does Brexit impact the number of Coca-Cola’s that Europeans will drink post-Brexit?
• Will BMW or Mercedes sell fewer vehicles?
• Is it possible that foreigners will actually buy more from Great Britain since their currency has devalued?
• Are you truly thinking differently about where, and on what, you will spend your money this morning?

Capitalism is the free enterprise system in which the world’s businesses are controlled by private owners for profit, rather than by the state. Capitalism has shown amazing resiliency to weather uncertain times created by world wars, assassinations, natural disasters, economic recessions, credit downgrades, housing crises, etc. and march onward to reward investors who invest or lend their capital to these businesses. Our faith in this system and our belief that clients will be rewarded is not shaken by Brexit. History and data are certainly on our side.

The outcome of the Brexit referendum was always expected to be very close. On balance, the market anticipated a “Remain” vote. When this didn’t happen, the opening market prices reflected the outcome. However, we do not believe it is prudent to make changes in response to this new information. Changes to your long-term strategy should only be made based on changes in your own personal situation and your goals.

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Is Today's Market More Volatile?

February 2016

Is Today’s Market More Volatile?

This question has come up frequently in recent meetings with investors. It is not surprising when you consider the level of media attention on volatility and the advent of new phrases like Flash Crash and High Frequency Traders.

A recent article published by The Motley Fool investment website caught my eye. The author, Morgan Housel, produces four charts that show the volatility of the S&P 500 returns in daily, weekly, monthly and annual terms by decade. You can view his article and charts by clicking here.

What may surprise you most is that the last five years have actually been more tranquil than any period since the 1950’s despite what the financial media continually tells us. The “wild” 2000s had similar annual volatility to the 1950’s when the S&P 500 generated 467% in total returns.

The most important lesson is that over meaningful periods– year-to-year, decade-to-decade – market volatility is the same as it ever was. Investors will have a much better investment experience when they ignore the short-term “noise” and stay focused on the long-term strategy that a caring wealth manager has built for them.

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Perspective on a Market Pullback

January 2016

The first few trading days of 2016 have seen volatility return to the stock market. The recent downturn has been attributed primarily to fears of a slowdown in the Chinese economy and a continuing slide in the energy (oil and gas) sector. Short-term traders are making bets on the impacts that these and other events may have on the global economy, and this is spiking volatility in stocks around the world.

It is vitally important, however, that long-term investors not get caught up in this short-term trading mentality. The concerns about the Chinese economy and sliding oil prices are not new; the market grappled with them for much of last year. Moreover, downturns of this magnitude - whatever the reason - are not as unusual. In fact, pullbacks of 5% or more typically occur several times per year in the market. Source: JP Morgan Asset Management 

Furthermore, as illustrated in the chart below, there have been numerous major pullbacks during the past five years - even as the S&P 500 nearly doubled in value.    Source: JP Morgan Asset Management 

During each one of these pullbacks, the causes attributed to them were often presented as dire by the financial media. Yet in hindsight we can hardly remember the source of concern.

Pullbacks such as these may tempt investors to flee stocks, but history shows that attempting to time the market actually increases risk for an investor versus staying the course and riding out the volatility. It is important to remember, then, that diversification and a long-term perspective are the keys to riding out volatile times in the market.

If you have any questions about your financial plan and portfolio strategy, please do not hesitate to contact us. 

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