Now What? After The Storm

We were in a drought of historic proportions. Restaurants no longer offered water with meals. Washing a car in the driveway was forbidden. Yards were brown from watering restrictions. Farmers were not allowed to irrigate crops. “Lakefront” homes were now Lake “View” homes, if they were lucky. Some just had a view of weed infested valleys.

Photo by Praveen

Then it rained.

And it rained…

…and it rained…

…and it rained. Baseball games were cancelled. Outdoor weddings were moved inside. BBQ plans and swimming pool openings were postponed.

Then it rained some more. It rained more in May in Austin than it ever had, at least since records have been kept.

Then came the rain bomb. It rained so much in such a short period of time during the Memorial Day weekend that downtown Austin flooded. In nearby Wimberley, tragedy struck when the Blanco River flowed out of its banks during the night leading to over a dozen lives being lost.

Finally the clouds broke and the sun reappeared. Those that were lost were mourned and will be terribly missed. The mud, muck, and debris have been cleaned up and the rebuilding process begun. The grass is now green, the lakes are mostly full, and everyone is talking about how wet this winter may be when El Niño returns.

Sound familiar?

Recently, after months of moving sideways, the storm clouds gathered over the stock market. Greece still owes more than they can repay, the price of oil has plummeted (that’s bad?), and China is figuring out the hard way that markets price assets much more efficiently than governments.

On August 17th, the S&P 500® closed at 2102. Was that thunder in the distance?

On the 18th the index lost about -5 points. A few drops hit the windshield.

Then -17 points down on the 19th. It was time to turn on the wipers.

Another -44 points on the 20th. Wipers on high.

-65 points on the 21st. Started to think about pulling over somewhere.

Then the bottom fell out on Monday, August 25th. Closing down -78 points at 1893, or about 10% below where it started on the 17th.

Why didn’t we stop under that bridge back there!?

It is very normal to wonder when or if it may stop. It is also common to believe that you should have seen it coming, that's just human nature. Fortunately, no injuries have been reported, even though many portfolios have suffered undeniable damage. It's time to be thankful for what you have, hug your loved ones, and start the repairs.

There will be no shortage of pundits claiming to have predicted this all along, or that the worst is yet to come. Just remember that the evidence shows that the vast majority of forecasters that get it right are just lucky. Furthermore, for your long term goals, stocks will earn more than cash or bonds. The trade-off is occasionally dealing with volatility like we've seen recently.

If you can’t stomach the thought of another tempest, perhaps it may be worthwhile to make some changes. You can do that by revisiting your plans, making sure the goals you set out to accomplish are still applicable, then making adjustments as appropriate. Having a good plan includes understanding how volatile markets can be, not taking more risk than you can tolerate, and occasionally re-balancing.

At ATX Portfolio Advisors, we don't try to forecast the ups and downs. We believe in purpose based investing, disciplined asset allocation, and using evidence based investing principles. We also believe in not piling on fees during downturns. If you have questions or would like to discuss your situation, give us a call.

Last Day of Summer, Football, and Homework

Photo by frankieleon

“7th round! That's five players from Westlake in “The League” next year!”

That was a text from a buddy shortly after the NFL’s draft last spring. Westlake is the Austin, TX community in which my family and I reside. Our school district is frequently ranked among the best performers in just about everything. Whether its academics, athletics, or other extra-curricular activities, the achievements of our children are a source of pride throughout the community.

With summer coming to a close and fall football practice already underway, I was reminded of that text message and was curious just how impressive of a feat producing that many professional players really was.

According to the NCAA 2013-14 High School Athletics Participation Survey, there were 1,093,234 participants in high school football in 2013-14. This year, there were 255 draft slots in the National Football League. Since those participants range across four classes, about 1020 will ultimately be drafted over the four year period starting in 2018. That’s around .009%, or in this case, 1 out of 1072.

Those are pretty low odds, but how much better are the chances at a high school that has had arguably one of the best records around of producing NFL talent? I looked up the biographies of those five current players and determined that they graduated high school between 1997 and 2011. Then I looked at last year’s rosters for the Westlake High School teams (Freshman, Junior Varsity, and Varsity) and counted 280 total players. Extrapolated over the fourteen year period of 1997-2011, I estimated 3,920 had suited up for the Chaps in that timeframe. Five of those making it to the pros equates to 1 out of 784, or about .01%.

Now that is better than the national average, but still ample reason to encourage our young athletes to study hard after practice.

You are probably wondering what does this have to do with investing? For the same reasons we encourage our children to plan to make a living with their brains, statistics suggest we should do the opposite with our investments. That's right, less time and thought about what we buy and sell.

Over the ten years ending in 2014, only 18% of actively managed stock funds (the ones where really smart people spend a lot of time studying what to invest in) outperformed their respective benchmarks. Looking at it from a slightly different angle, in the year 2000 there were 2,711 actively managed equity funds, according to CRSP Survivor-Bias-Free Us Mutual Fund Database. 682 of those (25%) beat their respective benchmarks over the ten years ending in 2009. So certainly, your odds would improve if you just focused on buying the last decade’s winners, right?

Barely! Of those 682 “winners”, only 28% beat their respective benchmarks over the following five years ending in 2014.

The next ten years won’t necessarily look like the last but even if active managers have twice as much success as they had over the past decade, the odds would still be about the same as a coin flip. While that’s substantially greater than Junior’s chances of suiting up with pads and helmet on Sundays, it’s not enough evidence to convince us to try and outguess the market. 

That should leave plenty of time for homework and watching football.