Don’t Overreact to the Movements

Posted by John Charles Kernodle on July 10, 2020  /   Posted in Newsletter

With the first half of 2020 behind us, it seems like a good time to reflect on where we’ve been and where we think things might go. The goal isn’t to armchair quarterback what’s happened or consult a crystal ball to determine what might happen next. Instead, I want to focus on two things:

1) Why an investment philosophy matters

2) What we can control

Let’s pretend for a moment that your “strategy” for investing in 2020 relied only on news reports. Think about how you would have reacted to the following:

  • In six months, we’ve seen three of the worst 25 losses and two of the largest 25 gains for the S&P 500.1
  • In 16 trading days, the S&P 500 plummeted 20% from its peak, creating the fastest bear market in history.  It took only 3 more trading days for the S&P 500 to plummet 30%.2
  • There have been 35 daily gains or losses of 3% or more this year.  Over the past 5 years, there have been just 11 moves of 3% or more in total.3
  • From 2015-2019, we didn’t experience a single daily gain of 4% or more. In 2020, we’ve already seen it eight times, with five of the days hitting 6% or higher.4

See the problem? With all that conflicting information, making investment decisions becomes really difficult. That’s why we’re such big supporters of investing based on long-term prospects and protecting portfolios with easy-to-understand strategies, like avoiding unnecessary fees and expenses. It’s not fancy. It won’t make big headlines. But it will, over time generate results.

This leads to the second point. We don’t know what the rest of the year holds. We have zero control over what the markets will do next or what might happen in the world. But we can control what we do.

It starts with remembering that you’ve adopted a financial plan for the very purpose of helping you deal, both emotionally and strategically, with the ups and downs in the market. Even if we weren’t in the midst of a global pandemic, investors will still have to deal with the widespread civil unrest and a presidential election cycle. The fact remains that markets move, and sometimes, they’ll move over little things just as fast as big ones.

Our goal is to not overreact to those movements. That goal becomes much easier when we have the foundation of a proven investment philosophy combined with a willingness to focus on what we can control.

We can’t afford to get distracted, and that’s why at Strathmore we’re always available to chat. Sometimes, a quick conversation is all it takes to get refocused.

We look forward to speaking with you sometime soon.

Take care and stay safe. We’re here for you if you need us.

Best Regards,

John Charles Kernodle
President/CCO

 

Ben Carlson, “Is This The Most Volatile Year Ever?”, A Wealth of Common Sense, June 12, 2020
Beth Kindig, “Algorithms sped up selling, leading to the fastest bear market in stock market history”, Market Watch, March 26, 2020
Ben Carlson, “The 2020 Stock Market By the Numbers”, A Wealth of Common Sense, June 7, 2020
Ben Carlson, “The 2020 Stock Market By the Numbers”, A Wealth of Common Sense, June 7, 2020

Good Fundamentals

Posted by John Charles Kernodle on April 22, 2020  /   Posted in Newsletter

When we rang in the New Year almost four months ago, I doubt anyone could have predicted the current situation. As we get used to things like picking up groceries curbside and keeping six feet between us and the next person, I think it’s important to address the elephant in the room.

When will things go back to “normal?”

It’s essential to recognize that our new normal probably won’t look the same as the old normal. That’s true for every crisis that’s touched our country (see the changes made since September 11, 2001, and the Great Recession of 2008-09). But I believe we can count on the fundamentals providing us with a path forward.

Those fundamentals include people wanting to work, wanting to build businesses, and wanting to provide for their families. All these activities lead to the exchange of goods and services between individuals and companies. This activity creates the necessary value to justify investment for today and into the future. That investment builds a foundation for a diverse and robust economy.

When you talk to any of us at Strathmore, you won’t hear us panic about recent events or the decline in the financial markets. Instead, we’ll focus on a) your financial goals, b) our long-term plan for the achievement of your goals, and c) your portfolio as the long-term funding for that plan.

It’s this long-term approach that allows us to remain calm and optimistic about the future.  We understand that each crisis that preceded the coronavirus pandemic got resolved, economic activity began growing again, and the value of a globally diversified portfolio resumed its long-term upward trend.

That’s why we believe it’s so critical to understand the fundamentals. While the world around us will change, those fundamentals will be our guide. We are a nation that will come back from the extremes of today to shape our new normal into something better.

The same holds true for our markets and investments. This, too, shall pass.

We don’t know the day, the week, or even the month. But we do know that the fundamentals haven’t failed us before, and we have every reason to believe they’ll pull us through to the other side.

Just like before, we’re here to listen and to answer your questions.  We welcome all questions and value any opportunity to speak with our clients. Stay safe and my best to you and your family during a difficult time.

We’re Here to Help

Posted by John Charles Kernodle on March 19, 2020  /   Posted in Newsletter

The COVID-19 (Coronavirus) pandemic continues to change our community, state, nation, and world on a daily basis. Part of our compliance program here at Strathmore Capital Advisors involves us being prepared to provide our services under less than normal circumstances.

The key goal of our Disaster Recovery Protocol (DRP) is to make certain our business is not interrupted due to an emergency that would force our office to close for a period of time. We have tested our DRP and are confident in our capabilities to execute our plan and continue to provide service as usual.  In addition, we have made the decision to cancel all face-to-face meetings until further notice. However, we are available for meetings via telecommunications.

We will continue to be available to answer any questions that you may have.  We are committed to maintaining a seamless level of service through this disruption. Please refer to the contact information at the bottom of this correspondence if you have any questions or would like to arrange a meeting.

We look forward to meeting with everyone again as soon as possible.  Please stay safe and take care of your families, friends, and community during these extraordinary times.

What We’re Seeing in the Market

Posted by John Charles Kernodle on March 02, 2020  /   Posted in Newsletter

It’s been a difficult week in the market. We saw the biggest, one-week sell-off since 2008. The elephant in the room is the Wuhan coronavirus. But somewhere on the periphery sits the reality that the market probably needed an excuse to cool off from its epic run of 2019.

We don’t claim to have any idea how far this outbreak will spread, nor how many lives it will claim, before it is brought under control. We are reasonably certain that many (or perhaps most) of the world’s leading virologists and epidemiologists are working on it. It’s our opinion, but we believe that their efforts will ultimately succeed.

If we go back in time to similar outbreaks in this century, it’s a reasonable opinion. Just consider the following:

  • SARS in 2003-04, also originating in China
  • The bird flu epidemic in 2005-2006
  • In 2009, a new strain of swine flu
  • The Ebola outbreak in the autumn of 2014
  • The mosquito-borne Zika virus outbreak in 2016-17

On the first day of the SARS epidemic, the S&P 500 closed at 855.70. Seventeen years and six epidemics later (including the current one), the S&P 500 closed at 2,954.22 on Friday, an increase close to 3.5 times higher. I’m confident that you see where we’re going with this and why we consistently discuss developing a plan and asset allocation model that will allow us to remain consistent through any market environment.

What’s an Investor to Do?

Posted by John Charles Kernodle on February 04, 2020  /   Posted in Newsletter

Let’s play a game. The rules are simple. I’m going to share three headlines, and you guess when these news stories appeared.

1) “The Stock Market’s Dangers Are Easier to See Now”
2) “American Exceptionalism May Be Ending — At Least in Stocks”
3) “Dow Tumbles Nearly 800 Points as Trade Jitters Return”

Here’s a hint. It wasn’t 2008.

No, it was a lot more recent. In fact, all three of these headlines appeared the first week of December 2018. At the time, the pessimism around the market and the general economy made it seem we were on the verge of another recession. The “smart bet” seemed to be cash out, stuff the money under the mattress, and hunker down until the worst passes.

Except all that pessimism came to naught. Instead, it was another year of double-digit returns for the U.S. stock market.

What’s an investor to do?

For years now, we’ve made it our mission at Strathmore Capital to help answer that question. The answer isn’t exciting enough to make headlines. In fact, it’s so simple, some folks don’t believe it can work. It’s only three steps.

1) Identify your financial goals through a well-constructed financial plan
2) Invest in a diversified portfolio that fits your goals
3) Stay disciplined

None of the steps are that complicated. They do require focus, a willingness to ask questions, and a commitment to follow through—even when the headlines suggest the end is nigh. Ultimately, we’re the buffer against the noise. Of course, we love helping folks figure out #1 and #2, but time after time, #3 seems to be where we help people most often.

When financial advisors first start out, I suspect many of us think it’s all about the numbers. Get the mix of investments right, and the bottom line will take care of itself. But a week, a month, maybe even a year, goes by and the phone rings. The anxious voice on the other end wants to know if the talking head on CNBC is right and a bear market is just around the corner.

That first phone call won’t be the last. Something will happen, either personally or in the larger world, and the very human response will be to DO SOMETHING. But if folks have clear goals and a low-cost, diversified portfolio in place, one of the hardest things we help our clients do is…nothing.

A year ago, it seemed so logical, so rational, to step away from the stock market. All the signs (at least the ones highlighted in the news) seemed to point to one, obvious outcome. You were ignoring the “facts” if you didn’t understand that the U.S. was a headed to a recession.

Here’s a fact that history seems to confirm. Attempting to guess what the market will do next is a fast track to frustration and unhappiness. I can’t (and won’t) attempt to predict what will happen during 2020. But I do know that for 15 years we’ve helped dozens of folks reach their financial goals by putting our clients first and choosing to think about wealth differently. That’s an outcome I’ll put up against any headline.

I’m sure I’m right

Posted by John Charles Kernodle on November 12, 2019  /   Posted in Newsletter

“I’m sure I’m right.”

At some point in our lives, we’ve all said something similar. We’re convinced beyond a reasonable doubt that what we think we know is correct — until it isn’t. A big part of that certainty comes from something very human: confirmation bias.

We all have it to some degree. At different moments in our lives, and on a wide range of subjects, we seek out information that appears to confirm what we “know.” Along the way, we ignore (usually subconsciously) anything that contradicts what we “know.”

Then, we’re shocked when what we thought we knew turns out to be something different.

No surprise, it happens a lot when we talk about money and investing. For instance, I’m pretty sure I’ve heard just about every variation of, “I’ve found an amazing investment opportunity that’s guaranteed to generate huge returns.” But when I start asking questions, even general, high-level ones, the answers tend to skew in the direction of folks ignoring contradictions in favor of data and details that reinforce the amazing opportunity.

What makes this bias so tricky is that even very smart people can still get caught in the trap. It’s not a case of intelligence, but one of being human. That said, there are some good reasons to challenge ourselves to push back against the comfort zone of assuming we’re right.

Let’s start with the basic understanding that we like being right. Who doesn’t? But I believe that our desire to be right should be the start of our search and not the end. History shows us though that it can be tough.

In January 1920, Charles Ponzi opened a new firm, Securities Exchange Company. Promoting postal reply coupons as an investment tool, Ponzi convinced people they could make huge returns in excess of 400% buying cheap coupons in countries like Italy and reselling them in the U.S.

Convinced of Ponzi’s scheme, often by other happy investors, everyone from policemen to bankers started piling into his firm. By June, folks had invested $2.5 million. The numbers just went up from there with a million coming in per week, and then a million per day. But there was a catch (there’s always a catch): Ponzi still hadn’t figured out how to sell the coupons. He was paying off investors using other people’s money. There was no real investment, but that didn’t stop people from wanting to believe it was real.

During the height of his scheme, Ponzi made $250,000/day, and one newspaper even went so far as to imply that investing with Ponzi returned 50% after only 45 days. The day after it appeared, thousands descended on Ponzi’s office wanting to invest. However, only weeks later, it all came crashing down. Other reporters and financial authorities started asking questions about how Ponzi’s investment actually worked, and before long, his past as a convicted forger and other prior bad acts surfaced.

Investors panicked, and their demands for money toppled the scheme and collapsed six banks in the process. Investors ended up with 30 cents on the dollar with losses of $20 million or $256,759,000 in 2019 dollars. Almost 90 years later, Bernie Madoff pulled off an even greater heist, costing investors around $18 billion.

These schemes work because people want to believe they work and go searching for information that confirms their beliefs. In our search to be right, we sometimes ignore information that tells us something else. Who wouldn’t want to earn huge investment returns with little risk? But that shouldn’t stop us from considering ALL the relevant information — both the good and the bad — available to us.

It’s not easy, and in fact, it can be downright uncomfortable at times. But confirmation bias can trick us into making or sticking with bad decisions. And when those decisions involve money, the consequences can be life-changing.

My advice is pretty simple, if not always easy. Challenge yourself to ask, “Why might I be wrong?” Then, go looking for the answers. If nothing else, it may help you see additional angles you hadn’t considered that reinforce your original position. In the end, I think we’d all prefer to be really right instead of really wrong even though we’re sure we’re right.

Understand What’s Happening Now

Posted by John Charles Kernodle on July 24, 2019  /   Posted in Newsletter

For 121 months, the U.S. economy has grown, and grown, and grown. It represents the longest run of economic growth since 1854. In real terms, that translates into hundreds of thousands of new jobs and double-digit returns in the stock market. But more than one economist (and history) predicts that we’ll experience a recession — eventually.

What’s a smart investor to do?

Here’s a hint. It doesn’t involve tea leaves or crystal balls. Instead, it starts with recognizing that investment markets don’t come with expiration dates. In fact, the worst thing you can do is try to predict what will happen next and base your investing decisions on those guesses. You might get it right once or twice, but long-term, it’s a path to financial frustration.

Instead of focusing on what might happen next in the markets, it can be helpful to better understand what’s happening now. We’re at a critical point in the history of the world. Within the last thirty years, we’ve seen the introduction and mass adoption of technologies that were once the stuff of science fiction.

Our world has gotten both smaller and bigger over those same years. We can travel to countries thousands of miles distant in a matter of hours, while modern companies have built global production chains spanning continents. All these changes combine into a world economy that looks nothing like it did even 50 years ago, let alone 100.

Understanding that the fundamentals of our economy have shifted drives the critical discussion around our need for diversified investment portfolios. Back in the day, it wasn’t uncommon for someone to only own stock in, say, AT&T or Coca-Cola. Certain companies were “safe” investments. The general public also didn’t have an easy way to access markets, so there wasn’t a widespread interest in buying and selling stocks like we see today.

All of this leads to a question that we’ve heard more than once: “Is this time different?” In other words, should you be doing something different because we’re on track for record-long growth?

The short answer: No — assuming you’re doing what you’re supposed to be doing.
So, what should you be doing? You’ve heard me say it before, but the good stuff that works doesn’t change:

  • Save as much as you can
  • Follow a well-diversified investment plan that considers where you’re at today and where you want to go tomorrow
  • Avoid making bad decisions based on headlines and fear

Some folks refer to these suggestions as the Sunday School answers — they’re the easy answers that everyone gives. But funny enough, just because everyone knows them doesn’t mean everyone is doing them.

Over the coming weeks and months, there will be plenty of talk about a lot of economic issues, including the 2020 elections, trade negotiations, and business regulation to name a few. And depending on how long U.S. growth continues, I expect pundits will get louder as they try to outguess each other predicting the next recession.

But I’ll leave you with my prediction. At some point, something will happen that affects the U.S. and possibly the global economy. What that thing will be and when it will happen, well, I’ll leave that to the pundits. But what you can expect from me, and the folks at Strathmore Capital Advisors, is a willingness to help you ignore the noise and navigate the ups and downs of our ever-changing world.

The Lost Decade

Posted by John Charles Kernodle on April 22, 2019  /   Posted in Newsletter

Do you remember the Lost Decade? It’s a reference to 2000-2009 when U.S. stocks took a bumpy ride. For instance, if you invested $1 in the S&P 500 on January 1, 2000, it would be worth around 90 cents on December 31, 2009. Meanwhile, most equity classes outside of the U.S. generated positive returns for the same period.

The Lost Decade

Ouch. That definitely hurt more than a few investors whose portfolios were solely focused on the U.S. market.

But we need to face a hard truth. We have no way to predict when a similar situation might happen again. After all, past performance is no guarantee of future performance.

So, where does that leave us?

Well, we could stick all our money under the mattress. Other than a lumpy bed though, we won’t get much benefit from that option. But there’s another possibility that can make a difference: diversification.

Let’s be clear. Meaningful diversification isn’t about a portfolio with a mix of stocks from different companies in the same sector. It’s also not about picking and choosing a bunch of individual stocks based on your secret formula. (Hint: Just because you love a product doesn’t mean you should own the company’s stock.)

When we talk about diversification at Strathmore, we’re talking about a broad and balanced portfolio based on a range of global investments. Why global? Because as we’ve seen time after time, international markets often move opposite of each other. A diversified portfolio tries to capture a reasonable slice of that total investing world.

Think of it as blending a bunch of different risk together to hedge against the ups and downs that come with investing. Again, diversification doesn’t come with a guarantee, but it’s a valuable tool that too often gets ignored. Diversification also helps when we look at individual behavior.

Warren Buffett, the Oracle of Omaha, got it right when he said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Now, as smart and wise as that advice might be, how easy is it to practice in reality?

Think back to the headlines that dominate our financial news. The focus tends to be on the really good news or the really bad news about the specific performance of an individual stock or even index. The really good news can tempt us to abandon our financial plan and pile into whatever “hot” stock has everyone excited. The really bad news can give us a push to jump out of an investment at the exact worse moment.

With a diversified portfolio, we’re smoothing out the rough edges and making it easier — at least emotionally — to weather the ups and downs that come with investing because we’re not relying on any one investment to determine success. Of course, as with any other investing tool, it doesn’t come with a guarantee. But diversification’s long-term value has been proven time and again, and it remains one of the best paths forward to moderate our risk against another Lost Decade.

This Time Isn’t Different

Posted by John Charles Kernodle on January 18, 2019  /   Posted in Newsletter

Over the past few weeks, the financial media have obsessed over market corrections and bear markets. But disciplined, long-term investors know something they don’t: Market corrections aren’t necessarily a bad thing.

In technical terms, a market correction means a 10% (or greater) drop from the most recent high. That seems like a big deal unless you understand that all this movement feeds the returns we’ve come to expect from investing in stocks. In other words, to realize a benefit from markets going up, at some point, they need to go down.

Now, let’s look at bear markets. If we see a 20% (or greater) drop from a most recent high, and it lasts two months or longer, we call that a bear market. Since the end of World War II, the S&P 500 experienced 14 bear markets. On average, they lasted 14.5 months and the peak to trough decline averaged about 30%.

In other words, we feel that these episodes have proven to be nothing more than temporary interruptions from the overall upward trend.

By the Numbers: The History of Bear Markets

Market selloffs can distract even the most experienced investors. Nobody enjoys seeing their retirement account take a 30% hit. Here are three tips to help you stay focused on your financial goals during the next correction:

Stick to Your Plan – At Strathmore Capital, we believe a well-designed financial plan takes into account bull markets, bear markets, and everything in-between. We craft your asset allocation to help you reach your financial goals, regardless of the short-term volatility in the markets.

Remember This Time Isn’t Different – Don’t buy into the media’s obsession with the next market selloff. Remember 2008 and all the doomsday stories of the time? The S&P 500 has quadrupled since the trough of 2009. We believe that, like all corrections and bear markets before, this too shall pass.

Take Advantage of the Sale – Treat these episodes as an opportunity to add to your retirement accounts at reduced prices.

Noise in the markets

Posted by John Charles Kernodle on November 28, 2018  /   Posted in Newsletter

Over the last few weeks, you’ve probably seen some of these headlines:

  • The worst of the correction could still be ahead for the market, and one chart offers evidence
  • Are we entering a bear market?
  • Dow drops 800 points, led by tech shares, as stock market investors fear higher rates

I think it’s time I let you in on the secret: none of these headlines matter.

It doesn’t matter if they were written last week, last year, or even in the last decade.
Just consider these “classics” from 2014, another year for mid-term elections:

  • Stocks plunge on emerging market fears
  • Big stock drops rock Wall Street
  • Stock market volatility fans fears about equities

There will always be noise in the financial markets. Financial reporters will continue to write stories about the noise. It has nothing to do with you.

Here’s another secret: people with diversified, carefully designed financial plans that fit their goals get to ignore the noise.

But, because we’re all human, even the savviest of investors appreciate being reminded that:

  1. The noise doesn’t matter.
  2. One of the main reasons you have a diversified plan is so you can tune out the noise.

So, that’s my goal today. To help you remember that the things you can control, you’ve controlled. The rest? It’s just static trying to distract you from your goals.

Fair warning though. With the start of a new year just around the corner, the volume will probably get turned up, and the predictions will start flying.

Over the next few months, we’ll continue to see headlines that talk about trade wars, deficits, and interest rate hikes. If you must, read them to stay informed, but please don’t stress over what it all means.

Because here’s my final secret: You can’t do anything about any of it.

The markets will do what the markets will do. The normal ebbs and flows of the financial markets will continue, and the noise surrounding these events will persist.

It’s why I push so hard for you to have a plan designed to absorb the ups and downs of the markets. As the noise intensifies in the background, you can stay focused on what matters most to you.

It’s a message that I hope stays with you during the upcoming holidays as you spend time with friends and family. Enjoy your time together and remember that you can turn the noise off at any time.

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