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Your Best Path: Gordon Achtermann on Investing Vol.1.1

Your Best Path: Gordon Achtermann on Investing Vol.1.1

March 19, 2021
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Welcome to the inaugural edition of "Your Best Path: Gordon Achtermann on Investing"

50,000-foot View

 

My Outlook for Stocks:

 

                      1   2   3   4   5   6   7   8   9   10

Bearish       -------------------------X--------       Bullish  (8+)

 

The Fed's Current Position:

 

Hawkish    ----------------------------------X-       Dovish (10)

 

Yield Curve: Normal, trending steeper

        

Commentary:

There will come another time when I say, as I did in 2007, that we are in a bubble.  While certain stocks are probably overvalued, I think a solid case can be made for a rising market prediction or a falling market prediction.  Multiple record-breaking fiscal stimulus bills and ongoing Fed monetary stimulus, along with pent-up consumer demand, has me convinced that the economy will grow rapidly for the remainder of 2021. The stock market usually does not go down when economic growth is accelerating unless there is an external shock like an oil embargo, a terrorist attack, or a pandemic.

Almost a year ago, Chairman Powell said that the Fed would do whatever it takes to keep the economy afloat.  I see no change in his maximally accommodative posture and that has me feeling bullish about the stock market in the near to medium term.

30,000-foot View

 

Age*      Recommended Allocation (Stocks – Bonds - Cash**)

20's         100 – 0 – 0

30's         90 – 5 – 5

40's         80 – 10 – 10

50's         70 – 10 – 20

60's         65 – 10 – 25

Retired   60 – 10 – 30 ***

* If you started saving late, you need to be investing like a 20-year-old for the first 10 years.

** A portion of your "Cash" may include other hedges, such as this layered combination of funds: DRSK, PHDG, SWAN, JHEQX (equal weight to each).

*** Retirees that have accumulated more than enough to live well may consider an even lower stock allocation.

Commentary:

Normally, there is no need for cash in efficient portfolios.  However, we are in the midst of an unusually risky time for bonds.  What I mean is that the probability of interest declining (which increases bond values) is near zero, and the probability of interest rates increasing (which hurt bond holdings) is near certain.  Therefore, at least half of what would generally be allocated to bonds is recommended to the cash allocation.

It is reasonable to ask, "What about stocks? Aren't their valuations so high that they are also risky?" My answer is that it depends on how you define risk.  Stocks are volatile, but a diversified portfolio has an effectively near-zero risk of default and a near-zero inflation risk if held over 3 years.  If you need the money in less than 3 years you should not be investing anyway - you should be saving in Money Markets or CDs.

I do not know when the next market correction or bear market will start, but I do know that we will recover from it over time.  If you are working and accumulating assets, you need to remember that risk (volatility) ensures you get a lower-than-average price when you buy stocks through the advantage of dollar-cost-averaging.*  As Peter Lynch said, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves." 1

* If you are even slightly unsure how dollar-cost-averaging works see the video on this page: https://www.investopedia.com/terms/d/dollarcostaveraging.asp 

 

10,000-foot View

 

Sector Allocation: Cyclicals

Rising interest rates are also driving a rotation from growth stocks to value stocks, and we are only in the early stages of this move. 

It would be a mistake to assume that all tech stocks will suffer equally from this.  Apple, Google, and Microsoft could limit their borrowing to preserve earnings as all have in the neighborhood of $100 Billion of cash net of debt.  

Nonetheless, we have a classic opportunity to capitalize on better prospects for specific sectors which make up the "Cyclicals" of the market.

Companies in the Financial sector are generally able to increase earnings as interest rates rise and the yield curve steepens (see above.)  They can borrow at the short-term rate (less than 0.25% for 2 years or less) and make loans based on the 10-year rate (around 1.6%) plus their usual margin.

The Consumer Discretionary sector is cyclical and includes stocks in restaurants, travel, furniture, entertainment, and so on.  All the goods and services you spend money on that are neither staples such as most groceries, utilities, most healthcare nor manufactured durable goods.  The virus has beaten down most of these companies (with with work from home exceptions like Peloton), but the light at the end of this dark tunnel is getting unmistakably bright. 

Vaccines will be available to all adults that want them by the end of May, which means that unless there is a mutation of the virus that the vaccines do not stop, things will get back to very nearly normal this summer.  Many of us who have not left the house unless we had to for over a year are planning vacations to remember.  I expect consumer discretionary spending to increase dramatically in the second half of the year, driving these company's stock prices higher.

Autos, construction, steel, mining, energy, apparel, semiconductors and other industries will see growth of varying degrees as this scenario plays out.

Ground-Level View

If you are looking for individual stock picks, this letter is not the place to find them.  I have no issue with clients or anyone buying individual stocks as long as they recognize that 99% of the time, such activity is speculation and not investing. 

Only holders of the CFA (Certified Financial Analyst) designation are qualified to pick stocks, and most of them work for Wall Street firms or large institutional investors.

No one can consistently beat the market by picking stocks.  Every superstar fund manager eventually runs out of luck, and their returns come back down to earth.  The problem is, we do not know when this will happen.  When I recommend an actively managed fund, it is because the fund manager is implementing a strategy that is not available in any other investment vehicle, but is needed by the client.

It is essential to note that luck can masquerade as skill.  Even the most skillful managers eventually run into a problem when their fund becomes too big to invest in small companies without moving the market for that company with every buy or sell decision.

Do not despair.  A disciplined approach works without the need for luck.  It takes time, but the result is inevitable.

 

1 As quoted in "The Wisdom of Great Investors: Insights from Some of History's Greatest Investment Minds, by Davis Advisers, p. 7

About Gordon Achtermann: Gordon is a CFP® candidate with expected completion in May of 2021.  He has a BA in Economics from Duke University, an MBA from the Keller Graduate School of Management, A graduate Certificate in Financial Planning from Bryant University, and the CSRIC (Chartered SRI Counselor) designation from the College for Financial Planning. Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC-registered investment advisor. Tel: (910) FEE-ONLY. Your Best Path Financial Planning may offer investment advisory services in the State of Virginia and in other jurisdictions where exempted. Investing involves substantial risk and has the potential for partial or complete loss of funds invested. The investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial or tax advisor, accountant, or attorney with regard to their specific situation.