Shooting Down a Fallacy, Technically

Do you believe in technical analysis or market timing? 
No.

The question above was number 13 in the “The 19 Questions to Ask Your Financial Adviser” that were suggested recently by Wall Street Journal columnist, Jason Zweig. The response was my answer in last week’s “Answers to…” those questions.

Admittedly, I didn’t provide much color to that particular answer. Subsequently, I received several questions as to why I so readily dismiss those popular trading tactics. Seriously? Questioning my judgement? I'll tell you what, let's grab a couple of six-shooters and step outside.

Don't worry, no one will get hurt. We'll have an old fashioned shooting match that should illustrate my point. I'll even let you pick the rules from the two choices below.

  1. We will put targets up on the side of barn. We’ll each take 3 shots and the one with the most bullseyes wins.
  2. We will each take 6 shots at the barn, then we’ll draw a circle around the tightest groupings. The one with the 3 closest shots in a circle wins.

Which approach makes sense?

While option one will probably result in the best marksman winning, the second option will likely demonstrate what is known as the Texas Sharpshooter Fallacy. This approach leads to false conclusions characterized by ignoring differences in data while stressing similarities. By discounting errant shots and only choosing the ones that yield the desired result, we might as well flip a coin to determine who is the better shot.

This is also how technical analysis, or using charts to predict future prices, frequently works. Adherents will insist that they can successfully predict how an investment or market will perform based on easily recognized patterns formed by charting the historical prices of those assets. My personal observation has been that chartists are remarkably skilled at explaining why things happened after they occur, but are no better than random chance if those predictions are made in advance.

The subjective nature of what constitutes a buy or sell chart shape has resulted in sparse academic research on the topic, but there is some. A 2003 study by economist Gerwin Griffioen concluded that: "for the U.S., Japanese and most Western European stock market indices the recursive out-of-sample forecasting procedure does not show to be profitable, after implementing little transaction costs."[i] 

Another 1996 study of "momentum strategies" concluded that even small transaction costs would lead to an inability to capture any excess from such strategies.[ii]

To be fair, there is also some research that suggests there may be some value in these approaches, but keep in mind that correlations can be found in all manner of data. Random correlations, however, don’t necessarily lead to sound decision making. For example, should we do away with lawyers based on the following parellels observed by Spurious Correlations?

Sorry, bad question (and apologies for the low blow to my attorney friends). Hopefully, you can see that a determined artist (or "analyst") can paint just about any picture. If you would like your portfolio managed with more science and less art, get in touch.

 

 

[i] Griffioen, Technical Analysis in Financial Markets

[ii] Chan, L.K.C.; Jegadeesh, N.; Lakonishok, J. (1996). "Momentum Strategies". The Journal of Finance. The Journal of Finance, Vol. 51, No. 5. 51 (5): 1681–1713.

Answers to "The 19 Questions to Ask Your Financial Adviser"

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Sometimes, it takes a jarring event, such as the Equifax hack that resulted in about half of the people in the country having their SSN’s, DOB’s, names, and addresses stolen, to realize that it’s not just what you don’t know that can hurt you. Rather, it’s what you don’t know that you don’t know that can really leave a mark. With so many of us potentially exposed to identity theft through no fault of our own, perhaps it is time to start asking more questions. For example, if you don’t know what ATX Portfolio Advisors® does to protect your privacy, you can read our policy here.

If you are wondering what else you don’t know that you don’t know, Wall Street Journal columnist, Jason Zweig, recently wrote about “THE 19 QUESTIONS TO ASK YOUR FINANCIAL ADVISER”. All of these questions will help you to know your advisor a little better, and possibly learn some things you didn't even think to ask. I've included the questions and my answers to them below:

  1. Are you always a fiduciary, and will you state that in writing? Yes, and I do.
  2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? No.
  3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? No.
  4. Will you itemize all your fees and expenses in writing? Only when your account balance is higher than the previous month. (Otherwise, there are no fees to itemize).
  5. Are your fees negotiable? Everything is negotiable.
  6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? We offer three fee-only pricing models, including hourly and retainer.
  7. Can you tell me about your conflicts of interest, orally and in writing? Absolutely. While I strive to minimize conflicts wherever possible, the fact that I am a for profit enterprise inherently presents a conflict that all customers should be aware. However, our Fee-Only (When You’re Up) approach not only offers clients a good value, but it squarely aligns our interests.
  8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? Never.
  9. Do you pay referral fees to generate new clients? Never.
  10. Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? As a wealth management business, I focus on your particular needs and offer advice accordingly in all of these areas, and more.
  11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? Never. Nor do I offer any incentives for professional referrals to ATX Portfolio Advisors®.
  12. What is your investment philosophy? Markets work, focus on evidence-based approaches, keep costs down.
  13. Do you believe in technical analysis or market timing? No.
  14. Do you believe you can beat the market? Not without taking more risk than the market, there is no free lunch. Studies consistently show that the majority of active managers underperform the market. However, I believe that building portfolios that emphasize factors shown through academic research to produce higher expected returns coupled with innovative portfolio management and trading approaches can result in better outcomes than most other approaches.
  15. How often do you trade? Not often. Rebalancing trades occur when accounts drift away from their models by certain tolerances, and occasionally a new strategy will be incorporated if there is academic evidence to support it.
  16. How do you report investment performance? I use a vendor call Blueleaf to send weekly performance information to all clients, and to offer a performance reporting dashboard.
  17. Which professional credentials do you have, and what are their requirements? I am a CFP®, which requires a bachelor’s degree from an accredited college or university, 3 years of full-time personal financial planning experience, completion of a CFP-board registered program, and 30 hours of continuing education every 2 years. Additionally, I am a member of the National Association of Personal Financial Advisors (NAPFA), which requires an additional 30 hours of bi-annual continuing education. I have passed the NASAA Investment Advisers Law Examination (Series 65) and maintain that registration. In the past, I have also held various FINRA and state licenses including The General Securities Representative Qualification (Series 7), The General Securities Sales Supervisor Qualification (Series 9, 10), The Uniform Securities Agent State Law Examination (Series 63), and Texas and California Life Insurance licenses. 
  18. After inflation, taxes and fees, what is a reasonable estimated return on my portfolio over the long term? This depends on your asset allocation, which is determined by understanding your goals and risk tolerance and asset location, as well as your personal tax situation. When doing financial plans, the expected returns I use are more conservative than actual historical returns, while the risk and inflation estimates are more reflective of actual experience.
  19. Who manages your money? I manage all of my personal investments in the same model portfolios that I invest my clients’ money in.

Do you have other questions? Get in touch.

Freezing Out "Protection" Rackets, Like Equifax (et al)

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I’ve got a great idea for a new business. I’ll offer banks and other companies interested in individual consumers’ credit histories access to that information if they will provide me all of their customers' personal information. First, I'll sell the banks a quick and easily accessible database of virtually every person in the country. Then, I’ll offer those consumers “protection” to guard against bad guys stealing the information that the banks give me. 

Oh, and what if I lose some of your information? I’ll offer monitoring and protection for free for the next 12 months, if you’ll just give me your credit card number. I’m sure you’ll remember to cancel the monthly subscription when it starts hitting your statement for $19.95 per month next year. Right?

There is one slight flaw in my business plan, however. Consumers could just freeze their credit. A freeze makes it impossible for new credit accounts to be opened in your name. The cost can be up to $10 per credit reporting agency, but it’s not recurring and may even be waived in some circumstances. A freeze will make it more cumbersome to apply for credit, but it is the best protection against identity theft. Unfortunately for me, it may ruin my perfectly planned protection racket.

If you want to know the next steps to implementing a freeze on your credit, the Federal Trade Commission has a Credit Freeze FAQ that is a good place to start. If you’ve already decided to act, you can contact each agency at the links or phone numbers below:

TransUnion

Equifax

Experian

An Economics Lesson from "The Crisis"

Image from Imgur

Image from Imgur

Did you survive the gasoline crisis of last week? If you were out of town for the weekend, you may have missed that as word got out about a bunch of Houston area refineries being inundated by Hurricane Harvey, drivers all over Texas scrambled to top off their tanks. This led to an economics lesson for all of us.

The lesson? Markets work, just not perfectly.

Even though Texas produces more oil than any other US state, that crude oil still needs to be refined into various petroleum products, such as gasoline. It was estimated that flooding from Harvey reduced US gasoline production by about 2 million barrels per day, which was about a 21% drop from the week before.        

When demand suddenly spikes for any good or service and the price remains unchanged, shortages are almost certain to happen. In this age of social media, it took just a few Tweets and Facebook posts of lines at some gas stations to incite hysteria. The demand spiked before many gas retailers realized what was happening, resulting in their pumps running dry before being able to adjust prices.

Personally, I knew something was out of the ordinary when my wife called to tell me to go get gas. When I asked why, she said a friend had just emailed that a tanker was pulling into a neighborhood convenience store and that I better hurry if I wanted to fill up. The friend, who is a wonderful person by the way, has probably never pumped a drop of her own gas. Something was definitely amiss.

By then, however, the market had already started to allocate resources effectively. The gas station in question raised their prices as the cars following the tanker lined up at the pumps to wait their turn. In some isolated cases, prices doubled or even tripled, leading to some misguided complaints of price gouging. (Note: In Texas, price gouging laws only apply in designated disaster areas.)

At the same time, distributors realized they could divert deliveries from neighboring states, where prices were lower, into Dallas and Austin and make a nice profit. The higher prices made it less likely that as many folks would succumb to the urge to fill an already half full tank. Thus, more fuel was available for those that really had a need , like those that had a couple of empty 55 gallon trash cans that needed filling.

Here we are a week later and every station in town is apparently stocked and prices have already started coming back down. Whew, we survived!

For some thoughts on surviving the next market crisis, I’ve included this month’s Issue Brief from Dimensional Funds titled Lessons for the Next Crisis. Now, does anyone know where I can get a “I survived the Harvey Gasoline Crisis of last Thursday” t-shirt?


Lessons for the Next Crisis

September 2017

It will soon be the 10-year anniversary of when, in early October 2007, the S&P 500 Index hit what was its highest point before losing more than half its value over the next year and a half during the global financial crisis.

Over the coming weeks and months, as other anniversaries of major crisis-related events pass (for example, 10 years since the bank run on Northern Rock or 10 years since the collapse of Lehman Brothers), there will likely be a steady stream of retrospectives on what happened as well as opinions on how the environment today may be similar or different from the period leading up to the crisis. It is difficult to draw useful conclusions based on such observations; financial markets have a habit of behaving unpredictably in the short run. There are, however, important lessons that investors might be well-served to remember: Capital markets have rewarded investors over the long term, and having an investment approach you can stick with—especially during tough times—may better prepare you for the next crisis and its aftermath.

BENEFITS OF HINDSIGHT

In 2008, the stock market dropped in value by almost half. Being a decade removed from the crisis may make it easier to take the past in stride. The eventual rebound and subsequent years of double-digit gains have also likely helped in this regard. While the events of the crisis were unfolding, however, a future of this sort looked anything but certain. Headlines such as “Worst Crisis Since ’30s, With No End Yet in Sight,”[1] “Markets in Disarray as Lending Locks Up,”[2] and “For Stocks, Worst Single-Day Drop in Two Decades”[3] were common front page news. Reading the news, opening up quarterly statements, or going online to check an account balance were, for many, stomach-churning experiences.

While being an investor today (or during any period, for that matter), is by no means a worry-free experience, the feelings of panic and dread felt by many during the financial crisis were distinctly acute. Many investors reacted emotionally to these developments. In the heat of the moment, some decided it was more than they could stomach, so they sold out of stocks. On the other hand, many who were able to stay the course and stick to their approach recovered from the crisis and benefited from the subsequent rebound in markets.

It is important to remember that this crisis and the subsequent recovery in financial markets was not the first time in history that periods of substantial volatility have occurred. Exhibit 1 helps illustrate this point. The exhibit shows the performance of a balanced investment strategy following several crises, including the bankruptcy of Lehman Brothers in September of 2008, which took place in the middle of the financial crisis. Each event is labeled with the month and year that it occurred or peaked.


Exhibit 1.       The Market’s Response to Crisis

Performance of a Balanced Strategy: 60% Stocks, 40% Bonds (Cumulative Total Return)

In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Marketwide Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% Citigroup World Government Bond Index 1-5 Years (hedged), 10% Citigroup World Government Bond Index 1-3 Years (hedged), 10% BofA Merrill Lynch 1-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Citigroup Indices used with permission, © 2017 by Citigroup. Bloomberg Barclays data provided by Bloomberg. For illustrative purposes only. Dimensional indices use CRSP and Compustat data. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Rebalanced monthly. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See Appendix for additional information.

In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Marketwide Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% Citigroup World Government Bond Index 1-5 Years (hedged), 10% Citigroup World Government Bond Index 1-3 Years (hedged), 10% BofA Merrill Lynch 1-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Citigroup Indices used with permission, © 2017 by Citigroup. Bloomberg Barclays data provided by Bloomberg. For illustrative purposes only. Dimensional indices use CRSP and Compustat data. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Rebalanced monthly. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See Appendix for additional information.

Although a globally diversified balanced investment strategy invested at the time of each event would have suffered losses immediately following most of these events, financial markets did recover, as can be seen by the three- and five-year cumulative returns shown in the exhibit. In advance of such periods of discomfort, having a long-term perspective, appropriate diversification, and an asset allocation that aligns with their risk tolerance and goals can help investors remain disciplined enough to ride out the storm. A financial advisor can play a critical role in helping to work through these issues and in counseling investors when things look their darkest.

Conclusion

In the mind of some investors, there is always a “crisis of the day” or potential major event looming that could mean the beginning of the next drop in markets. As we know, predicting future events correctly, or how the market will react to future events, is a difficult exercise. It is important to understand, however, that market volatility is a part of investing. To enjoy the benefit of higher potential returns, investors must be willing to accept increased uncertainty. A key part of a good long-term investment experience is being able to stay with your investment philosophy, even during tough times. A well‑thought‑out, transparent investment approach can help people be better prepared to face uncertainty and may improve their ability to stick with their plan and ultimately capture the long-term returns of capital markets.

Appendix

Balanced Strategy 60/40

The model’s performance does not reflect advisory fees or other expenses associated with the management of an actual portfolio. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor’s decision making if the advisor were actually managing client money. The balanced strategies are not recommendations for an actual allocation.

International Value represented by Fama/French International Value Index for 1975–1993. Emerging Markets represented by MSCI Emerging Markets Index (gross dividends) for 1988–1993. Emerging Markets weighting allocated evenly between International Small Cap and International Value prior to January 1988 data inception. Emerging Markets Small Cap represented by Fama/French Emerging Markets Small Cap Index for 1989–1993. Emerging Markets Value and Small Cap weighting allocated evenly between International Small Cap and International Value prior to January 1989 data inception. Two-Year Global weighting allocated to One‑Year prior to January 1990 data inception. Five-Year Global weighting allocated to Five-Year Government prior to January 1990 data inception. For illustrative purposes only.

The Dimensional Indices used have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inceptions dates. Accordingly, results shown during the periods prior to each Index’s index inception date do not represent actual returns of the Index. Other periods selected may have different results, including losses.

Index Descriptions

Dimensional US Large Cap Value Index is compiled by Dimensional from CRSP and Compustat data. Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market with market capitalizations above the 1,000th‑largest company whose relative price is in the bottom 30% of the Dimensional US Large Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price. The index emphasizes securities with higher profitability, lower relative price, and lower market capitalization. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: non-US companies, REITs, UITs, and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to March 2007. The calculation methodology for the Dimensional US Large Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market with market capitalizations above the 1,000th‑largest company whose relative price is in the bottom 20% of the Dimensional US Large Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price.

Dimensional US Small Cap Index was created by Dimensional in March 2007 and is compiled by Dimensional. It represents a market‑capitalization‑weighted index of securities of the smallest US companies whose market capitalization falls in the lowest 8% of the total market capitalization of the Eligible Market. The Eligible Market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: Non-US companies, REITs, UITs, and investment companies. From January 1975 to the present, the index also excludes companies with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Source: CRSP and Compustat. The index monthly returns are computed as the simple average of the monthly returns of 12 sub-indices, each one reconstituted once a year at the end of a different month of the year. The calculation methodology for the Dimensional US Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

Dimensional US Small Cap Value Index is compiled by Dimensional from CRSP and Compustat data. Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose relative price is in the bottom 35% of the Dimensional US Small Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price. The index emphasizes securities with higher profitability, lower relative price, and lower market capitalization. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: non-US companies, REITs, UITs, and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to March 2007. The calculation methodology for the Dimensional US Small Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1975: Targets securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market whose relative price is in the bottom 25% of the Dimensional US Small Cap Index after the exclusion of utilities, companies lacking financial data, and companies with negative relative price.

Dimensional International Marketwide Value Index is compiled by Dimensional from Bloomberg securities data. The index consists of companies whose relative price is in the bottom 33% of their country’s companies after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasizes companies with smaller capitalization, lower relative price, and higher profitability. The index also excludes those companies with the lowest profitability and highest relative price within their country’s value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional International Marketwide Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index.

Dimensional International Small Cap Index was created by Dimensional in April 2008 and is compiled by Dimensional. July 1981–December 1993: It Includes non-US developed securities in the bottom 10% of market capitalization in each eligible country. All securities are market capitalization weighted. Each country is capped at 50%. Rebalanced semiannually. January 1994–Present: Market-capitalization-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of a different quarter of the year. Prior to July 1981, the index is 50% UK and 50% Japan. The calculation methodology for the Dimensional International Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

Dimensional International Small Cap Value Index is defined as companies whose relative price is in the bottom 35% of their country’s respective constituents in the Dimensional International Small Cap Index after the exclusion of utilities and companies with either negative or missing relative price data. The index also excludes those companies with the lowest profitability within their country’s small value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional International Small Cap Value Index was amended in January 2014 to include direct profitability as a factor in selecting securities for inclusion in the index. Prior to January 1994: Created by Dimensional; includes securities of MSCI EAFE countries in the top 30% of book-to-market by market capitalization conditional on the securities being in the bottom 10% of market capitalization, excluding the bottom 1%. All securities are market-capitalization weighted. Each country is capped at 50%; rebalanced semiannually.

Dimensional Emerging Markets Index is compiled by Dimensional from Bloomberg securities data. Market capitalization-weighted index of all securities in the eligible markets. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.

Dimensional Emerging Markets Value Index is compiled by Dimensional from Bloomberg securities data. The index consists of companies whose relative price is in the bottom 33% of their country’s companies after the exclusion of utilities and companies with either negative or missing relative price data. The index emphasizes companies with smaller capitalization, lower relative price, and higher profitability. The index also excludes those companies with the lowest profitability and highest relative price within their country’s value universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008. The calculation methodology for the Dimensional Emerging Markets Value Index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. Prior to January 1994: Fama/French Emerging Markets Value Index.

Dimensional Emerging Markets Small Cap Index was created by Dimensional in April 2008 and is compiled by Dimensional. January 1989–December 1993: Fama/French Emerging Markets Small Cap Index. January 1994–Present: Dimensional Emerging Markets Small Index Composition: Market-capitalization-weighted index of small company securities in the eligible markets excluding those with the lowest profitability and highest relative price within the small cap universe. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. The index monthly returns are computed as the simple average of the monthly returns of four sub-indices, each one reconstituted once a year at the end of a different quarter of the year. Source: Bloomberg. The calculation methodology for the Dimensional Emerging Markets Small Cap Index was amended on January 1, 2014, to include profitability as a factor in selecting securities for inclusion in the index.

 

 

 

 

 

 

 

 

 

 

 

Source: Dimensional Fund Advisors LP.

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

 

 

 

[1]. wsj.com/articles/SB122169431617549947.

[2]. washingtonpost.com/wp-dyn/content/article/2008/09/17/AR2008091700707.html.

[3]. nytimes.com/2008/09/30/business/30markets.html.

Recovering From Harvey

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It’s been a rough week in the Lone Star State.

Seven days ago, as I was putting the finishing touches on last week’s Accountable Update, Hurricane Harvey was rapidly strengthening into the strongest storm to hit the Texas coast in over 50 years. In the article, I took some pot shots at the “breathless TV meteorologists” that seemingly relish presenting worst case scenarios when making predictions.

In hindsight, at least in this instance, those dire prognostications proved to be more right than wrong. Perhaps I owe our local weather folks an apology for my skepticism and should direct my sardonic comments to the national media and politicians that are already politicizing our fellow Texans’ tragedy while many are still in harm’s way. On the other hand, maybe we all should expend our energy on helping those in need.

It has been difficult to sit idly by while our families, friends, and customers have experienced the devastation of Harvey first hand. However, it has been heartening to witness our state and country rally to help. There are many worthy recipients of assistance, but if you are looking for an idea, check out TD Ameritrade’s offer to our customers to match contributions made to the American Red Cross. Matching donations can be made through this link.

You can stretch your giving dollars further if you happen to own appreciated stocks in a taxable account. By gifting the property directly to a charity or through a Donor Advised Fund, you get the benefit of being able to make a tax deductible gift up to 30% of your adjusted gross income while also avoiding paying capital gains taxes.

If you have suffered losses from the storm, you have probably seen some of the reports in the media that there was some urgency to make your insurance claims by yesterday. The urgency stemmed from reports about House Bill 1774, which was a tort reform law that came out of the recent 85th Texas Legislature that sought to limit excessive lawsuits resulting from “forces of nature”, primarily hail storms.

The law reduces some of the penalties that insurance companies may be subject to if found to act “in bad faith” resulting from a civil court judgement.  In other words, the law only applies to people suing their insurance company. There should be no impact on making claims under existing insurance policies. It’s also worth noting that losses covered by the National Flood Insurance Program or the Texas Windstorm Insurance Association are not impacted by the new law.

Hopefully, that is one less thing for victims to worry about as they focus on recovery.

Weather often offers similes for investors. We rebuilt smarter portfolios after the major storm of the Great Recession, as we will construct better buildings in Harvey’s wake. We got back on the bull to share in the market’s gains, as we will head back to the bays to angle for trout and redfish.

Then we can get back to discussing why anyone would want to invest in unicorns run by eccentric billionaires or live in places with high taxes, earthquakes, or snow. In the meantime, let's roll up our sleeves and start cleaning up Harvey’s mess.

God Bless Texas!

Build a Financial Ark to Weather a Storm

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“Predicting rain doesn’t count, building arks does.”
-Warren Buffet
— https://www.brainyquote.com/quotes/quotes/w/warrenbuff701497.html

Mother Nature is having a heck of a week. She started off Monday by blotting out the sun, or at least about 65% of it here in Austin. You may think she would be satisfied with scheduling a total blackout for 2024, but she decided to keep us entertained this weekend (or terrified) by whipping up a little disturbance down in the Gulf of Mexico.

If you have watched any of the breathless TV meteorologists this week, you probably are aware that Hurricane Harvey is barreling down on the Texas coast and is expected to make landfall this evening. As with most things in the media, the business of getting you to watch is based upon grabbing your attention and holding it for as long as possible. That leads to sensational predictions and worst-case scenarios being presented, which frankly can be quite frightening.

But if you know someone that owns coastal property, you may be surprised by their attitude towards the risks associated with these events. Take, for example, ATX Portfolio Advisors® client and Rockport,TX homeowner David Fournier. When I asked him about his level of concern, he responded, “Because I grew up in New Orleans, storms are common for me. They just don’t worry me that much. Besides, that’s why I buy insurance.” 

“Because I grew up in New Orleans, storms are common for me. They just don’t worry me that much. Besides, that’s why I buy insurance.”  
-David Fournier
— 8/24/2017 Interview with Jeff Weeks

How common are they? Data from the National Oceanic & Atmospheric Administration’s Hurricane Research Division shows the actual number of storms that have hit the Texas coast since 1851 is 63, or about one every 2.6 years.  Major storms, also referred to as Category 3 or greater, were much less common. In fact, there were only 19 of them over that 166 year period, or one every 8.5 years. If you split the coastal regions of Texas into three geographic zones (North, Central, and South), the average zone has had a little over 6 major storms since a decade before the Civil War. That equates to one major hurricane every 26 years hitting a particular area of coastline.

For those that live or own property in coastal communities, spending a lot of time and effort worrying about something that happens once a generation may not rank high on the list of concerns, but that doesn't mean they shouldn't prepare for the worst. As Warren Buffet once said, “Predicting rain doesn’t count, building arks does.”

Building arks seems like hard work. A close inspection of the text of the book of Genesis in the Bible estimates that it took Noah, his wife, his three sons, and their wives between 55 – 75 YEARS to build their boat.

Fortunately, financial arks are not quite as, well, biblical in proportion.

In fact, you can build yours in three relatively easy steps.

  1. Establish ample liquidity. This can be an emergency fund of cash or credit availability (can be a line of credit or even a credit card), anything that can help you avoid having to sell assets at inopportune times. For example, how would you like to have been forced to sell stocks to replace your home's HVAC in August 2008? The amount needed can vary based on your personal circumstances, but a good rule of thumb is to have 3-6 months of expenses readily accessible for those unplanned rogue waves.
  2. Diversify. Allocating assets to investments across asset types, countries, and industries isn’t going to insure against losses, but can greatly reduce or even eliminate un-systemic risks. Bonds, for example, may not be very appealing due to low interest rates today, but when combined with a stock portfolio they can offer relative safe havens from the occasional volatility inherent to equities. That anchor can be very reassuring when the water gets choppy.
  3. Insure against catastrophe. Even though major storms don’t hit that often, when they do, the results can be catastrophic. Buy insurance for these events, such as premature death, disability, long-term care, or even longevity, to provide you (or your family) the resources to weather the worst storms.

I hope that everyone in Harvey's path finds shelter and protection, and that your property survives intact. If you need help planning for or building your ark for the next storm, get in touch.

3 Ways to Avoid 9 Mistakes

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Yesterday, the Dow Jones Industrial Average fell 1.2%, the S&P 500 shed 1.5%, and the Nasdaq Composite dropped 1.9%. It marked the end of a 63-day stretch where volatility has been remarkably absent. In fact, the last time we saw a streak of trading days with fewer 1% moves in either direction was in 1995.

Whether this is the start of a new period of increased volatility, or just a temporary blip on the screen, the tendency can be to react. That’s why it can be helpful to also study the history of mistakes that investors tend to make and the lessons we have learned.

Back in 2010, the Library of Congress’s Federal Research Division prepared a report titled Behavioral Patterns and Pitfalls of US Investors. The report identified common investment mistakes as cited by academics and professionals across several fields including business, economics, finance, psychology, and sociology.

The report identified nine common mistakes, which were also used as the basis for an Investor Bulletin from the SEC in 2014. The good news is that I think you can avoid making all nine of these mistakes in three relatively easy ways.

First, let's look at the mistakes.

The Mistakes

  1. Active Trading:  An investor using an active trading investment strategy engages in regular, ongoing buying and selling of investments.  This kind of investor purchases investments and continuously monitors their activities in order to take advantage of profitable conditions in the market.  The Report concludes that active trading generally results in the underperformance of an investor’s portfolio.
  2. Disposition Effect:  The disposition effect is the tendency of an investor to hold on to losing investments too long and sell winning investments too soon.  In the months following the sale of winning investments, these investments often continue to outperform the losing investments still held in the investor’s portfolio.
  3. Focusing on Past Performance of Mutual Funds and Ignoring Fees:  When deciding to purchase shares in a mutual fund, the Report indicates that some investors focus primarily on the mutual fund’s past annualized returns and tend to disregard the fund’s expense ratios, transaction costs, and load fees, despite the harm these costs and fees can do to their investment returns.
  4. Familiarity Bias:  Familiarity bias refers to the tendency of an investor to favor investments from the investor’s own country, region, state or company.  Familiarity bias also includes an investor’s preference for “glamour investments;” that is, well-known and/or popular investments.  Familiarity bias may cause an investor’s portfolio to be inadequately diversified, which can increase the portfolio’s risk exposure.
  5. Manias and Panics:  Financial “mania” or a “bubble” is the rapid rise in the price of an investment, reflecting a high degree of collective enthusiasm or exuberance regarding the investment’s prospects.  This rapid rise is usually followed by a contraction in the investment’s price.  The contraction, or “panic” occurs when there is wide-scale selling of the investment that causes a sharp decline in the investment’s price.
  6. Momentum Investing:  An investor using a momentum investing strategy seeks to capitalize on the continuance of existing trends in the market.  A momentum investor believes that large increases in the price of an investment will be followed by additional gains and vice versa for declining values.
  7. Naïve Diversification:  Naïve diversification occurs when an investor, given a number of investment options, chooses to invest equally in all of these options.  While this strategy may not necessarily result in diminished performance, it may increase the risk exposure of an investor’s portfolio depending upon the risk level of each investment option.
  8. Noise Trading:  Noise trading occurs when an investor makes a decision to buy or sell an investment without the use of fundamental data (that is, economic, financial, and other qualitative or quantitative data that can affect the value of the investment).  Noise traders generally have poor timing, follow trends, and overreact to good and bad news in the market.
  9. Inadequate Diversification:  Inadequate diversification occurs when an investor’s portfolio is too concentrated in a particular type of investment.  Inadequate diversification increases the risk exposure of an investor’s portfolio.

Three Ways to Avoid Them

1. Let the markets work for you. Outsmarting other investors is tough, especially when you add in transaction costs. Invest in the broad markets, keep your transaction costs down, and structure your portfolio around expected dimensions of returns.

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2. Diversify smartly. Diversification reduces risk that don't add to expected returns. Nearly half of the world's opportunities are outside the US.

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3. Have a plan. Investors are people that are subject to normal emotions. Having a plan in place that you can review when the going gets tough can make the difference in achieving your goals or not. Markets reward discipline.

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That's it, employ those three solutions and you will be well on your way to being a successful investor. Need help? Get in touch for a free review of your plan and portfolio.

Preparing to Get Hit by Life

Life is what happens to you while you’re busy making other plans,” John Lennon sang in a verse of Beautiful Boy. Mike Tyson put it more bluntly, “Everybody’s got plans…until they get hit.”[i]

I think back to my early 30’s when the .com bubble was expanding. Business was good in the financial trades, with stocks rising 20% every year and customers literally standing in line to invest. Retirement seemed a certainty by the time I was 40. Along the way, a new baby, a move to California, a “once in a generation” bear market, another baby, a move back to Texas, another “once in a generation” bear market, and a foolish notion to start a new business now have me approaching 50 and planning to work for the foreseeable future.

While some may argue differently about the bear markets, most would probably agree that none of those life events were catastrophic. But what if something had happened that truly altered my plans, or those of my family?

Probably the most obvious catastrophe that most people think of is an untimely demise. The odds of that happening are pretty low when you are in your 30’s. For example, according to the Social Security Administration's cohort life tables, a 30-year-old male has a 98.5% chance of living to age 40, 95.5% chance of making it to 50, and a 90.5% probability of reaching his 60th birthday. Ladies have even higher odds of reaching the golden years, with nearly a 94% chance. With odds that high, it isn’t surprising that term life insurance is relatively affordable.

Insurance works best when it is used to protect against low probability but high impact events, such as premature death. Nevertheless, paying an insurance company for 20-30 years of protection that is very unlikely to be used isn’t high on the list of expenses most folks look forward to paying. But the thought that our families would have to move because they can’t afford the mortgage or that the kids would be forced into debt to pay for college are enough to motivate me to write that check each year.

But there are other risks that are more likely to impact you than an early death. According to the SSA’s Disability and Death Probabilities, a male born in 1996 has about a 20% chance of becoming disabled before retirement age. Unlike death, with a disability you not only lose your earning potential but continue to need to support your family AND yourself.

Both life and disability insurance are important tools for protecting yourself from a knockdown blow, but they will cost you. How much you should buy can vary based on your personal goals, attitude towards risk, and family situation. An independent financial advisor may be your best resource for helping you answer the question of how much and then find solutions that suit you.

In addition, other steps to protect you and your family from a potential KO are:

Establish liquidity. An emergency fund with several months’ worth of expenses set aside is the easiest solution, but establishing credit before it is needed can also be effective. A line of credit or a credit card may be difficult to obtain or more expensive to use if you wait until the primary breadwinner has stopped winning bread.

Review the beneficiaries on your accounts and insurance policies. These designations work very efficiently to transfer assets after death without going through probate. However, failing to name them, or having the wrong ones (i.e. ex-spouses, minor children) can complicate or ruin your plans.

Write a will. Clearly state who should inherit your property and take care of your minor children, pets, etc. Appoint an executor that is willing and able to execute the will when the time comes.

Consider trusts. There is a myriad of trust types that accomplish different objectives. They can help avoid probate, protect assets from creditors, and insure they ultimately pass to the heirs or causes of your choosing.

Set up health care directives. Living wills, medical power of attorney, and HIPPA authorizations spell out your desires, who can make decisions, and who can even talk to doctors about your condition. These tools can insure that your wishes are followed in the event you aren’t able to communicate and help avoid emotional conflicts between well-meaning family members.

Establish durable power of attorney. In case you are unable to make financial decisions, having a trusted person (spouse, child, etc.) appointed as your attorney-in-fact that can handle your affairs can make life much easier on your family.

Title your assets correctly. All the steps previously mentioned can be voided or made more complicated by not titling assets correctly. On a financial statement, it is helpful to list the registration of all your assets so that your financial planner or attorney can help identify potential disconnects with your plans.

Finally, it’s also a good idea to put a recent copy of your financial statements, wills, trusts, insurance policies, deeds, and other important documents in a place where they can easily be accessed by your attorney-in-fact or executor.

Don’t know where to start? Get in touch to discuss your plans.

 

 

[i] https://www.brainyquote.com/quotes/quotes/m/miketyson379007.html?src=t_plans

Is the Market Due for a Wrench?

July marked the ninth consecutive month of positive returns in US stock markets. Rising tides lift all boats, but that hasn’t stopped some from taking credit.

Whose fault will it be when the inevitable downturn occurs? There will be plenty of blame offered, but you can be certain that at least one character won’t accept any of it. Believe me!

Since 1987, August has been the worst month for the S&P 500®, according to the Stock Trader’s Almanac. Also noted in the Almanac is that volatility typically picks up around this time of year. Given that the CBOE Volatility Index (also known as the VIX) hit its lowest level since 1990 last month, it wouldn’t be a shock to see some red numbers in the near term.

What also won’t be surprising is that someone will get credit for being the portfolio manager or trader that “predicted the selloff”, even though there is scant evidence of anyone consistently able to outguess the markets. In fact, in his 1973 book, A Random Walk Down Wall Street, Burton Malkiel argued, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

But perhaps Mr. Malkiel was just observing (unknowingly) that expected returns actually increase by using this method to manage a portfolio. Sound crazy? Then check out this month’s Issue Brief from DFA titled Quit Monkeying Around!

Come to think of it, that might also be a suitable response to a certain Tweeter in Chief after his next late-night tirade. Rest assured, if the market wilts in the August heat, it may not be our fault but we’ll be right by your side with our Accountable Wealth Management. Get in touch if you would like to discuss.


Quit Monkeying Around!

August 2017

In the world of investment management there is an oft-discussed idea that blindfolded monkeys throwing darts at pages of stock listings can select portfolios that will do just as well, if not better, than both the market and the average portfolio constructed by professional money managers. If this is true, why might it be the case?

The Dart Board

Exhibit 1 shows the components of the Russell 3000 Index (regarded as a good proxy for the US stock market) as of December 31, 2016. Each stock in the index is represented by a box, and the size of each box represents the stock’s market capitalization (share price multiplied by shares outstanding) or “market cap” in the index. For example, Apple (AAPL) is the largest box since it has the largest market cap in the index. The boxes get smaller as you move from the top to the bottom of the exhibit, from larger stocks to smaller stocks. The boxes are also color coded based on their market cap and whether they are value or growth stocks. Value stocks have lower relative prices (as measured by, for instance the price-to-book ratio) and growth stocks tend to have higher relative prices. In the exhibit, blue represents large cap value stocks (LV), green is large cap growth stocks (LG), gray is small cap value stocks (SV), and yellow is small cap growth stocks (SG).

For the purposes of this analogy you can think of Exhibit 1 as a proxy for the overall stock market and therefore similar to a portfolio that, in aggregate, professional money managers hold in their competition with their simian challengers. Because for every investor holding an overweight to a stock (relative to its market cap weighting) there must also be an investor underweight that same stock, this means that, in aggregate, the average dollar invested holds a portfolio that looks like the overall market.[1]

Exhibit 1.       US Stocks Sized by Market Capitalization

For illustrative purposes only. Illustration includes constituents of the Russell 3000 Index as of December 31, 2016, on a market-cap weighted basis segmented into Large Value, Large Growth, Small Value, and Small Growth. Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information.

For illustrative purposes only. Illustration includes constituents of the Russell 3000 Index as of December 31, 2016, on a market-cap weighted basis segmented into Large Value, Large Growth, Small Value, and Small Growth. Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information.

Exhibit 2, on the other hand, represents the dart board the monkeys are using to play their game. Here, the boxes represent the same stocks shown in Exhibit 1, but instead of weighting each company by market cap, the companies are weighted equally. For example, in this case, Apple’s box is the same size as every other company in the index regardless of its market cap. If one were to pin up pages of newspaper stock listings to throw darts at, Exhibit 2 would be much more representative of what the target would look like.

When looking at Exhibits 1 and 2, the significant differences between the two are clear. In Exhibit 1, the surface area is dominated by large value and large growth (blue and green) stocks. In Exhibit 2, however, small cap value stocks dominate (gray). Why does this matter? Research has shown that, historically over time, small company stocks have had excess returns relative to large company stocks. Research has also shown that, historically over time, value (or low relative price) stocks have had excess returns relative to growth (or high relative price) stocks. Because Exhibit 2 has a greater proportion of its surface area dedicated to small cap value stocks, it is more likely that a portfolio of stocks selected at random by throwing darts would end up being tilted towards stocks which research has shown to have had higher returns when compared to the market.

Exhibit 2.       US Stocks Sized Equally

For illustrative purposes only. Illustration includes the constituents of the Russell 3000 Index as of December 31, 2016 on an equal-weighted basis segmented into Large Value, Large Growth, Small Value, and Small Growth. Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information.

For illustrative purposes only. Illustration includes the constituents of the Russell 3000 Index as of December 31, 2016 on an equal-weighted basis segmented into Large Value, Large Growth, Small Value, and Small Growth. Source: Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Please see Appendix for additional information.

So…Throw Away?

This does not mean, however, that haphazardly selecting stocks by the toss of a dart is an efficient or reliable way to invest. For one thing, it ignores the complexities that arise in competitive markets.

Consider as an example something seemingly as straightforward as a strategy that holds every stock in the Russell 3000 Index at an equal weight (the equivalent of buying the whole dart board in Exhibit 2). In order to maintain an equal weight in all 3,000 securities, an investor would have to rebalance frequently, buying shares of companies that have gone down in price and selling shares that have gone up. This is because as prices change, so will each individual holding’s respective weight in the portfolio. By not considering whether or not these frequent trades add value over and above the costs they generate, investors are opening themselves up to a potentially less than desirable outcome.

Instead, if there are well-known relationships that explain differences in expected returns across stocks, using a systematic and purposeful approach that takes into consideration real-world constraints is more likely to increase your chances for investment success. Considerations for such an approach include things like: understanding the drivers of returns and how to best design a portfolio to capture them, what a sufficient level of diversification is, how to appropriately rebalance, and last but not least, how to manage the costs associated with pursuing such a strategy.

 

The Long Game

Finally, the importance of having an asset allocation well suited for your objectives and risk tolerance, as well as being able to remain focused on the long term, cannot be overemphasized. Even well-constructed portfolios pursuing higher expected returns will have periods of disappointing results. A financial advisor can help an investor decide on an appropriate asset allocation, stay the course during periods of disappointing results, and carefully weigh the considerations mentioned above to help investors decide if a given investment strategy is the right one for them.

Conclusion

So what insights can investors glean from this analysis? First, by tilting a portfolio towards sources of higher expected returns, investors can potentially outperform the market without needing to outguess market prices. Second, implementation and patience are paramount. If one is going to pursue higher expected returns, it is important to do so in a cost-effective manner and to stay focused on the long term.


Appendix

Large cap is defined as the top 90% of market cap (small cap is the bottom 10%), while value is defined as the 50% of market cap of the lowest relative price stocks (growth is the 50% of market cap of the highest relative price stocks). For educational and informational purposes only and does not constitute a recommendation of any security. The determinations of Large Value, Large Growth, Small Value, and Small Growth do not represent any determinations Dimensional Fund Advisors may make in assessing any of the securities shown.

 

[1]. For more on this concept, please see “The Arithmetic of Active Management” by William Sharpe.

Time for a New Pickup?

This summer has been a rough one for my old pickup. In early May, as the thermometer starting rising, my air conditioner went kaput. That cost me about $600 to make the repairs. Then, last week, alarm bells starting ringing and a red light shaped like a battery flashed on the dash. Unfortunately, it wasn’t a relatively affordable battery that needed replacing. Rather, it was a much more expensive alternator. After forking out another $500, the thought crossed my mind that it may be time to look for some new wheels.

New vehicles are probably the worst “investments” we make. It is not unusual to see the value decline by 50% in the first four years after driving off the dealer’s lot. That knowledge has led me to adopt a philosophy that I will drive our cars and trucks until “the wheels fall off” before buying a new one. As my unexpected repair expenses have accumulated though, some reminders of how expensive new cars can be helped to scratch that new car (or truck) itch.

I started with a quick visit to Kelley Blue Book® to see roughly what a new 2017 Ford F150 Platinum edition (the same model of my current pickup) would cost. $53,383 was the “Fair Purchase Price” that was indicated. Ouch, that was about all I needed to realize I am probably doing the right thing by continuing to drive my old pickup a while longer. But I can’t write an Accountable Update without analyzing it further, so I started checking out the values of older models, too.

I saw that a used 2013 model in good condition has a trade-in value around $26,000, which would be a pretty good indication of its actual value. Compared to the new price of $46,100 back in 2013, according to an article I found on Autotrader.com, it looks like the value has fallen just under half over the last four years. Of course, when you add in the approximate $3,400 of tax, title, and license costs in Texas (per this calculator on Carmax.com), plus whatever else you let the F&I guy talk you into at the dealership, and a 50% decrease per presidential term appears to be a good estimate.

That translates to a -15.91% annual rate of return. Put in dollar terms, a new $53,383 pickup would drop the following amounts over the next ten years assuming annual depreciation at that rate:

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Depreciation Illustration

$53,383 pickup with annual depreciation of -15.91%.

 

In the first three years, that’s a total of $21,641 of lost value versus only $12,868 over the next three. If you put 12,000 miles a year on the vehicle in this example, the depreciation cost per mile is 60.11 cents in the first three years versus 35.74 cents for the next three.* Consider that the IRS mileage rate in 2017 for business is only 53.5 cents per mile. You could also supplement your income by driving for Uber, but their base mileage rate starts at $1.06 per mile, and you would still need to buy gas! 

Remember that commercial that showed a guy driving an old car that spit change out of the air conditioning ducts? Driving a new car is like that, but exactly the opposite.

Some potential good news, especially if you are in the market for a new car, is that “…millions (of) cars that were leased two or three years ago, many of them used compact and midsized cars with low mileage, are heading toward auction lots and used car dealerships. That surge in supply threatens to depress prices for new and used vehicles…”, according to an Autonews.com article from earlier this month.

Some may be asking if a lease may make more sense than buying, but the lease amount incorporates the expected depreciation, taxes, and interest into the payment. At the end of the lease, you would then start the whole process over again, insuring that you are always paying the highest amount of depreciation. Plus you typically add in mileage penalties and wear and tear charges. 

There is nothing quite like that new car smell, except that you may find adding to your retirement account, the kids’ college, or travel funds are even sweeter. You can certainly reduce the amount of depreciation each year by driving a new vehicle longer, but buying the used pickup in the example above would mean you could add an extra $3,000 per year towards goals that may make you a lot happier.

If you would like to discuss any of those plans, get in touch.

If you are in the market for a car, it looks like your timing could be pretty good. As for me, I think I’ll stick with my old pickup for bit longer.

 

*Arithmateic error corrected from earlier version