Why Is My Account Up ??

“If the stock market is up 16%, why is my account only up 10% ?”

“Things are not looking so good, should I be doing something?”

“My account is down, should I be doing something?”

Reasons to be optimistic about the future --- either read to the end or skip to the end.

All are good questions that deserve a complete and thoughtful answer.  Often investors compare the performance of their portfolios with the returns of an index like the DOW Jones or S&P500 and wonder why they are not making as much when the index goes up.  

The question is:  “It doesn’t seem like my account is doing as well as the market?”  Simple answer, the investments in your account can be very different from the index. The S&P 500 is a weighted average price of 500 U.S. companies and only U.S. companies.   However, the U.S. is only 22% of the global economy and just over one-third of the total value of all company shares traded on global stock exchanges.  Therefore, limiting your company investments to only the 500 companies that comprise the S&P 500 is not true diversification.  At times your accounts will do better than the index and at other times, not as well.

Company shares historically provide good longer-term results even though the future is never guaranteed.  But in shorter time frames, the values may fluctuate quite a bit.   Tempering your portfolio with more conservative and less volatile bond holdings can take the shock out of the downward volatility a portfolio completely comprised of company shares may experience.  If your portfolio is half company shares (stocks) and half conservative investments (like bonds) your account will, in most situations, go up (or down) half as much as that index.

“Things are not looking so good, should I be doing something?”  What do you mean by “things not looking so good?”  Is the news scary? Are there wars and rumors of war?   Is Congress deadlocked?  Is a recession threatening?  Or maybe already in a recession?  Is the stock market doing so well you are afraid of it going down?   These are all normal and happen regularly and repeatedly.  Try not to be alarmed by the events of the day.  It is merely noise which happens over, and over, and over again.

Why is timing the stock market a fool’s game?  Unforeseen events are always going to change the direction and velocity of the market.   March of 2020 is the perfect example.   During February, no one expected the country and the world to shut down with all businesses, schools, and government offices closed and people told to stay home.  But that is what happened.

The S&P 500 plummeted 32% in twenty-three trading days. (1)  Never have we seen a decline so violent.  Then, after twenty-three down days, the stock market started up just as violently as the decline had been.

Why?  You don’t invest in the stock market.  You invest in companies.  The “stock market” does not make a product or provide a service that it sells.  The stock market has no employees, does not improve their operations or come out with new products.  Companies do all of that.  

The price of companies declined in March of 2020 because they laid off employees, could not buy raw material to make their products, and consumers temporarily stopped buying their products which all resulted in the companies making less profit.  Because of the lower profits, some investors lost faith in the companies and sold the stock.  Stock prices declined and the indices that are made up of the company stock went down.  

If you sold at this point, you “locked-in” your loss.  You guaranteed that loss.  Your only chance to make it up is to invest again.  Typically, it is very hard to get in near the bottom and most investors finally get back in at a higher price than they sold.

Guess what?  Many rational investors understood that the good companies were still good companies even after company stock prices declined over 30%.  They did not sell.  Other investors decided to buy more company shares to take advantage of the low share prices.  They believed the companies still had good products and would come up with new products and services to sell.  And with fewer employees the companies just might be more profitable than before.  If the company is more profitable, they will become more valuable and the price of stock will go up.  Therefore, now, the S&P 500 index is up 75% from the “COVID-low.”  (1)  You cannot invest directly in an index.

If you sold “because things don’t look so good” at the end of March 2020 you locked-in” your losses.   And subsequently missed out on up to a 75% profit.

What if you sold in February 2020 before the COVID-collapse and got out at the market high before the crash?  Short term….you look smart because you dodged the 32% temporary decline.  But now the same index is up 29% from the previous high in February 2020.  That is a 29% gain if you didn’t sell and just held your positions for eighteen months. (1)

If you have conservative investments like bonds in your account, your statement showed less decline in the bad times and fewer gains in the good times.

How do you measure successful investing?  My benchmark is simple.  And it is not about beating an index.  

Successful investing or money management means having the money to spend when you want to spend the money!  How do you do that?  Determine how much money you want to spend and when you want to spend it.   Write all that down.   Then work backwards.  How much money do you need?  When do you need it?  Commit to a plan.

Successful financial planning is not about picking the right companies to invest with and even less about guessing when to get in and out of the stock market.  Success comes from articulating your goals, defining the process and following through with the financial plan.  Managing your investments by gut-feelings, news reports, or even economic cycles is risky investing.

Facts:  Annually, the S&P 500 index of companies has gone up 75% of the year for the past ninety years; 7 of 8 every five-year period has had positive returns; and 9 ½ of every ten-year period has had positive returns.  The past cannot guarantee the future.  However, history can be compelling.

Why am I optimistic?  

• The current world population is 7.8 B people. (2)
1. Yet, today 3.6 B don’t have internet connection.   This will change.
2. 3 B don’t have adequate electricity.  This will change. (6)
3. 1B have no electricity.  That will change. (6)
4. 2.6 B people cook their meals and heat their homes with an open fire on the dirt floor of their home. This will change. (4)
• In 1950, over half the world population lived in extreme poverty.
• Now, only 9% live in extreme poverty. (7)
• Over the next fifty years, the rest of the world will move into the middle-class while extreme poverty will continue to fall. (7)

In my opinion, all of this economic growth will cause the growth of the global economy.  

Our job as your financial advisor is to provide guidance to accomplish your financial goals.  The financial plan is a living document.  It is your GPS or roadmap to guide your travels from your current location along life’s path to completing all of your milestones.  

Wollman Wealth Designs is located in Escondido and partners with families and trusts in San Diego County and around the country.   Your finances are personal and planning for them should be personal as well.  Call or email us with your questions.

1. https://finance.yahoo.com/quote/^GSPC/history?period1=1577836800&period2=1633910400&interval=1wk&filter=history&frequency=1wk&includeAdjustedClose=true
2. https://worldpopulationreview.com/
3. https://ourworldindata.org/a-history-of-global-living-conditions-in-5-charts
4. https://www.nationalgeographic.com/photography/article/guatemala-cook-stoves
5. https://stlpartners.com/research/understanding-why-half-the-people-in-the-world-dont-have-access-to-the-internet/
6. https://ourworldindata.org/energy-access
7. https://www.caixabankresearch.com/en/economics-markets/labour-market-demographics/emergence-middle-class-emerging-country-phenomenon

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