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2nd Quarter -What I learned about investing by saving 18 years for college

Quarterly Newsletter

There are two words that the countless investment articles, text books, television interviews, and lectures all share: Long Term.  It is said that to make money in the market you have to be “in it for the long term.”  Warren Buffet, perhaps the world’s most famous investor, tells us to “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”  Mr. Buffet’s favorite holding period?: “Forever”

The problem for most investors is that long term can be abstract, while the daily warnings on our smartphones and televisions of an upcoming “crash” are concrete.  The first half of 2018 introduced a number of challenges resulting in near flat returns for both the Dow Jones Industrial Average (-1.81%) and the S&P 500 (+1.67%).  The three most significant headwinds we face today are rising interest rates, an inverted yield curve and trade wars.

After nearly a decade of keeping interest rates low to stimulate the economy and support financial markets, the Federal Reserve (the Fed) has continued on its path to increase short- term rates to more “normal” levels.  Remember, short-term rates were near zero just a couple of years ago.  Mortgage rates were in the 3% range, and money markets and savings account returned next to nothing.  After seeing continued signs of economic strength, the Fed increased rates twice in 2018 with at least one more hike expected by year end.  Mortgages are now in the 4% range, though savers are finally earning a bit of interest on deposits.  Historically, rising rates have sometimes resulted in declining stocks prices, but studies show that generally occurred when the 10-year treasury had a yield greater than 5%.  When the yield was below 5% (today it is a bit under 3%) rising interest rates have usually meant rising stock prices.

In the past it seemed that discussions about inverted yield curves were confined to upper-level economics classes; not so over the past few months.  Much has been written and discussed about this relatively rare occurrence defined by having short-term interest rates that are higher than long-term interest rates.  This means that someone buying say a two-year bond gets a higher rate than someone buying a 30-year bond. Seemingly, this makes little sense since the 30-year owner has taken greater risk because he/she has tied up their money for a longer period of time.  An inverted yield curve reflects pessimism about the future health of the economy and provides a disincentive for banks to lend money.  Although we do not have an inverted yield curve today, it is much closer to being there than it was a year ago.  And while we are not there yet, since an inverted yield curve has preceded the last seven recessions, it has been heavily watched as of late.

In response to what he perceives as unfair trade practices and in an effort to protect domestic innovation, President Trump has both discussed and implemented a variety of tariffs with many trading partners.  In relation to the size of tariffs relative to overall trade volume, some see this as nothing more than negotiating tactics, while others are fearful of an all-out trade war.  One impact of a trade war would be rising prices of goods across the world, everything from cars to wheat, which would stifle growth.  At this point it is unclear where this is headed, and that uncertainty has caused some of the recent volatility.

Given these fears, and the fact that by historical standards we are overdue for a bear market, it is understandable that our minds get pulled away from the long term to the near term.  And while most headlines seem to be more fear motivated, economically there has been more signs of strength than weakness, not the least of which is the job market.  The national unemployment rate is at its lowest levels since 1969 and wages are increasing.  Since nearly 70% of our economic activity comes from consumer spending, having more people employed, making more money, will help to sustain and possible drive future growth.  The tax cuts have had an immediate impact on corporations especially.  After tax corporate earnings are at all-time highs, and are projected to increase yet further.  Corporations have been using the tax savings to increase dividends, repurchase company shares, buy competitors and invest in their business.  It is thought that the tax cuts dwarf any adverse impact of tariffs.  Government spending ($300 billion) as well as deregulation have also helped economic growth.  Finally, for all the talk of the market being overvalued, based on the most common measure of valuation (using corporate earnings) stocks are valued at exactly their 25-year average.

Of course, most times contain both reasons for optimism and pessimism, making figuring out short-term movements in the market virtually impossible.  Which brings us back to looking long term, and the difficulty in doing so.  A recent personal experience helped me, as an investor and Financial Advisor, put this in perspective.

As a father of four (ages 11, 13, 16, 18) college planning has had a strong presence in my financial plan since my first daughter was born on March 27, 2000.  My wife and I dutifully opened our first college savings account (529 plan) before our little girl got through her first box of diapers.  Practice what you preach.  I calculated how much we had to save per month for a quality education and the savings began.  As luck would have it, March 2000 was when the market began a three-year fall that would send it down nearly 40%.  The “dot com” bubble, Enron and Worldcom filing for bankruptcy and the tragic events of 9/11 all happened during this time.  At this point, nearly three years into saving (and another kid born in 2002) there was far less than what we had put into the account.  Yet we marched on, increasing our savings since there were now two.

A few years, and two more kids, later our values are a bit higher than our contributions.  There were some bumps but mostly smooth sailing.  Then came 2008 and the “Great Recession.”   Banks were closing, large Wall Street institutions declaring bankruptcy and the Fed going to extreme and unprecedented measures to save the world economy.  All along, the savings continued, and though painful to watch at times, we stayed the course, even though the stakes were higher.

It was only after the recovery began in 2009, nine years after the first account was opened, that we started to see meaningful earnings on our deposits.  Our timing was bad – the first 10 years have been referred to as “the lost decade” in the market – but we couldn’t control that.  We could however control our behavior, and while it was tempting to change course, we knew that sometimes doing nothing is often the right thing to do, even if it isn’t the easiest.  Now, as we are about to pay our first tuition bill in the next few weeks we see that our first child will have the benefit of a four-year education paid for by just the gains.

Selling into panic and buying into euphoria have become more pronounced as financial news coverage has permeated our everyday lives with hyperbolic headlines making “doing nothing” increasingly more difficult.   Often, understanding the role that money plays in the context of an overall financial plan helps investors maintain a long-term focus.  Perhaps that is why, according to research by Vanguard, working with a Financial Advisor leads to higher returns over time when compared with those who don’t use Advisors.  If you feel as though you are unsure as to the role that your money plays in your overall plan please give us a call so that we can help to redefine that for you.  Being armed with that knowledge will likely be the key to your investment success.

Enjoy your summer






Written by Robert C. Votruba, Ph.D., Director of Investments, National Financial Network LLC. Registered Principal and Financial Advisor of Park Avenue Securities LLC (PAS), 990 Stewart Avenue, Suite 200. Garden City, NY 11530. Securities products and advisory services are offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. National Financial Network LLC is not an affiliate or subsidiary of PAS or Guardian.
Opinions expressed herein are not necessarily those of Guardian or Park Avenue Securities. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security.
Data Source: FactSet

S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the
U.S. equities market. Indices are unmanaged and one cannot invest directly in an index. Each company’s security affects the index in proportion to its market value. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Dow Jones Industrial Average is a widely-used indicator of the overall condition of the stock market, a price-weight- ed average of 30 actively traded blue chip stocks, primarily industrials, but also includes financial, leisure and other service oriented firms. Data and rates used were indicative of market conditions as of the date shown and compiled by briefing.com. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results. Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Chicago Board Options Exchange Volatility Index (VIX) tracks the expected volatility in the S&P 500 Index over the next 30 days. A higher number indicates greater volatility.

The S&P MidCap 400 provides investors with a benchmark for mid-sized companies. The index seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data.

The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States.The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. The Nasdaq 100 Index is composed of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange.

Park Avenue Securities LLC (PAS) is an indirect, wholly-owned subsidiary of The Guardian Life Insurance Company of America (Guardian). PAS is a registered broker/dealer offering competitive investment products, as well as a registered investment advisor offering financial planning and investment advisory services. PAS is a member of FINRA and SIPC.


2018-62714 Exp 7/2020