I see many investment choices (usually mutual funds) that include stocks that are related to commodities, energy (oil), and others tied to interest rates. Traditional approaches to investing say that you should include a little bit of everything in your portfolio, because you never know what will go up or down in the future. By having a little bit of each asset type, you have a good chance that some will have gains when others have losses.
This sounds logical on the surface. However, according to Investopedia, investments that include commodities or energy-related stocks have higher volatility than some other market sectors.(1) Investopedia describes the impact that commodities (including oil and energy companies) have on broad indexes in which they are included (like the S&P 500 index): “Commodities can quickly become risky investment propositions because they can be affected by eventualities that are difficult, if not impossible, to predict. These include unusual weather patterns, natural disasters, epidemics and man-made disasters.”(1) In a May 7, 2016 article in The Daily Telegraph, they note that for the past two years, oil and energy stocks, as well as most other types of commodity investments have been out of favor, creating a negative drag on portfolios with exposure to those types of assets.(2)
Additionally, according to the following Wall Street Journal article, investments (usually mutual funds) that contain banking- and financial industry-related stocks tied to interest rates are volatile and have created a negative drag on most investments since 2007.(3) After the losses they sustained in 2008, this market segment never fully recovered. The losses are still considerable, according to an article in the Wall Street Journal on April 10, 2016. (3) The issue for investors is that even the S&P 500 Index is weighted approximately 24% with stocks related to the financial or energy sectors – creating a drag on returns for the past two years. (4)
Substantial Hidden Fees
The second reason I see for the losses in people’s investments are the fees tied to those investments. The financial industry has found a way to hide the fees for those who create and distribute investment products (primarily mutual funds). Those who receive these fees may include the advisor, the advisor’s company, and the mutual fund itself. All or most of these fees can be easily hidden or bundled in a way that an average investor cannot separate them out or negotiate them. They can be substantial and create a negative drag, even on an otherwise favorable asset.
What is the solution?
I believe the solution to the problem of investments that contain volatile or historically negative market segments is to use a more targeted approach to investing. Sectors. By using a targeted approach, market segments that have historically had exposure to more volatile sectors or more negative sectors can be avoided.
Next, investors should request a full disclosure of fees. This includes the fees to the advisor, the organization they are associated with, other outside managers involved in the management of the pool of assets, and the mutual fund itself. Ask your advisor to explain all of the fees to you or consult with an outside trusted advisor. If your investments are underperforming the S&P 500, then ask why you are paying fees at all, when letting your investments ride the S&P 500, free of advisor fees, would have given you better results.
A simple way to see how well your investments are performing is to put your investments in a chart and compare them to the S&P 500 index, which is a commonly used benchmark. I use www.yahoo.com or www.bigcharts.com for this analysis. I select periods of 1, 2, 5, and 10 year periods of time to do the comparison.
This approach may not tell you how much the investment’s performance is related to poor performing market sectors or high fees, but what it will tell you if there is a problem and that there may be a way to get better returns with less risk.
I encourage you to think for yourself, question what you are being told and do a little analysis of what you have been sold. I think you may be surprised by what you find.
Are you being fooled?
Do you truly know the health and the state of the stock market?
Do you know the warning signs to be on the lookout for?
If you’re like most investors the answer is likely no. Besides, why would you?
If you listen to the government and the media you’d think the stock market turmoil of 2015 is far behind us. What I’m going to tell you is neither sugar coated nor definitive, because anyone who wraps up the health of the markets in a pretty package and an air of certainty is too simplistic.
I want to pass on the sage advice from experts I respect: Don’t be fooled into believing that the economy and the stock market are somehow back in full recovery mode.
Be Wary of What You See on the News
Be wary of what the media and government publish.
If you’re like me you look at things with a critical eye and you’re wondering why I would make this recommendation.
Traditional thinkers in the financial and investment industry comprise a majority of the people you’re likely to interact with over your investing career. Even the best intentioned individuals usually have an incentive to keep you fully invested in what could be the wrong stocks and the wrong funds at exactly the wrong time.
Take all advice (even mine) with a grain of salt. That’s the best way to stay safe out there and keep up to date with the rollercoaster ride of the stock market.
Track Record Matters
At my firm, Reppond Investments, Inc., we firmly believe that track record matters. History should be looked at often and with a critical eye.
Studying the history of the stock market and the major hard times that have fallen upon the U.S. and Global economy can take years to properly recap and study.
Instead I suggest that you take a look at two recent stock market failures and how they could be indicators for even bigger things to come.
The Stock Market Crash of 2016
Yes, you read that right. I am in good company when it comes to critical examination of the stock market. Many industry experts speculate that another stock market crash will occur in 2016. To rewind a bit, I try to avoid listening to all of the pundits who have opinions about the future direction of the stock market – except those who have long term track records that I admire.
One of those is Jim Rogers, whose “amazing success was built on his uncanny ability to spot long-term trends well before the masses,” according to nasdaq.com.
Recently Jim Rogers was quoted about his view of 2016 in a wonderful, read-worthy article entitled “Stock Market Crash: Jim Rogers Has a Dire Warning for Investors”1. For those not familiar with Jim Rogers, he’s a highly respected, billionaire investor and the stuff legends are made of, well at least in the financial sector. Think, Indiana Jones but instead of the Lost Temple, he’s adventuring daily in the tombs of Wall Street.
Jim Rogers postulates that the stock market crash of 2008 was just a predictor of things to come and will pale in comparison to a forthcoming U.S. stock market crash of 2016.2
But why would this happen you may ask. Mr. Rogers believes that as 2016 progress we will see the U.S. equity market steadily expand. This coupled with weakening foreign currencies that will in turn create an increased demand for the U.S. dollar. And what do you get when this all happens? We get a currency bubble.1
In my view, no one has done a better job of seeing bubbles and predicting crashes than Jim Rogers. He carefully hedges his comments, and it is safe to say that neither he nor anyone else can truly and accurately predict the direction of the economy or the stock market.
Jim Rogers’ long and successful investing career speaks to his ability to have uncanny insights and wisdom about upcoming risks. It simply comes down to whom do you want to believe.
A Fundamental Problem: The Chinese Market Collapse of 2015
Let’s take a look at another economist worth knowing and following.
Economist Jim Rickards predicted in 2015 that the financial turmoil in China could ignite a stock market crash and possible economic collapse. That actually happened, as stock markets around the world were shaken based on various factors – all pointing to China, according to Rickards, in an article entitled, “Jim Rickards: China’s Stock Market Crash Isn’t Over Yet.”3
Rickards makes a bold statement in saying that “the worst is not over in China. The market won’t come rallying back, either. That’s not how bubbles work.” (Source: The Daily Reckoning, August 13, 2015.)
With respect to the Chinese economy, he argued that the crises are not only limited to the equity market, but that the overall economy is slowing down. He concludes, “It tells you that the fundamentals are terrible, which is what I’ve been saying all along.”3
This is a bit of a different story than we hear on the news, isn’t it?
What Does It All Mean and What Can You Do?
I reference Rogers and Rickards because of their track record in predicting bubbles and market cycles. If they are correct, I want to warn investors: Don’t Be Fooled.
For the past six months, the stock market in general has been going through a decline. There are a few small exceptions to this, but all of the investor portfolios I have seen have been in decline. However, since mid-February, many broad based indices have increased somewhat in value.
Most of my clients come to me with concerns about the health of the markets and how to best invest their money in light of forecast like the ones we just unpacked.
So how do you integrate these skeptical and foreboding predictions into your investment strategy?
The first step is simple. Begin by looking at your advisor. Look at the performance of your portfolio for 2015 and ask yourself the question: How pleased am I with the performance of my advisor’s recommendations?
The second is take an honest look at what your comfort level is with respect to the risk you’re willing to take on. How much risk are you taking for the amount of return you can reasonably expect?
I would encourage investors to be more in a defensive mode.
If you have other questions or want me to help you with a more specific analysis, give me a call and I will help you do the analysis on a complimentary basis.
1 “How To Invest Like Jim Rogers” by Mike Vodicka, Nasdaq.com, July 9, 2013
2 “Stock Market Crash: Jim Rogers Has a Dire Warning for Investors” by Palwasha Saaim, profitconfidential.com, January 22, 2016
3 “Jim Rickards: China’s Stock Market Crash Isn’t Over Yet” by Milad Marshasti, profitconfidential.com, August 14, 2016