by Rob Vogel
Quarterly Review-April 2019
The stock market rewards long-term investors
U.S. stocks recorded the best quarterly performance since 2009 with the S&P 500 up 13% in the first quarter.1 This followed the dismal performance at the end of last year where worries of a Chinese trade dispute, FED miscues on direction of interest rates, and government shutdown weighed on the stock market. In December, many were fearful that stocks would continue to fall, yet we advised patience because the economy was strong. Our decision paid off. By remaining invested we participated in the best quarterly performance in a decade. We don’t know exactly what will happen next week in the stock market; no one does. We do know that over the long run, owning a balanced portfolio containing stocks will give a good return. On average, stock prices have increased 11.4% per year over the past 90 years.2 However growth is not a steady climb because the stock market doesn’t go up 11% every year. Instead, we need to live through some bad years to get the good ones. Some years stocks will be up by 20 or 30% and in others, down by double digit amounts. The following chart is a good depiction of the ups and downs of the stock market from 1980 to 1st quarter 20193:
These annual variations can be disquieting. As humans, we are all driven by our emotions. For investing, emotions often get in the way of prudent decisions. When our portfolio has lost value, we become despondent and might think “if this continues, I won’t have enough money to live.” Our emotions tell us to sell and protect what we have. Then after periods of big gains, we think that the party is sure to continue and we don’t want to miss out on making even more money. Either selling after losses because of panic or buying after a period of gains on euphoria will detract from long term performance. It’s impossible to turn our emotions off. We can moderate our behavior by understanding that it’s natural to have these emotions. We used a roller coaster in a recent presentation to young investors to show that this is the normal path most people travel when the market goes up and down:
The volatility of ups and downs in the market as we have discussed, is predominately for stock investing. It is rare to have 100% stock in a portfolio. Most portfolios at Lucas Capital contain a mix of stocks, bonds and cash based on an asset allocation that is right for you. Bonds provide income with more stable value and don’t move up and down like stocks. Currently we see 10-year investment grade corporate bonds yielding around 4%. Cash is the most stable investment, but it also produces the lowest return over the long run. By combining allocations to stocks, bonds, and cash, we tailor a portfolio to provide a good return with risk tolerance appropriate for you. Conservative portfolios, having a higher percentage of bonds and cash, will be more stable than portfolios that contain a high percentage of stocks. Your investment portfolio needs to have the right asset allocation so that you can live with the emotional roller coaster of seeing the value of your portfolio change in the short run.
Give a man a fish and you feed him for a day …
With apologizes to Maimonides, we took liberty by changing a few words: “Give your children money and they will satisfy their immediate financial needs. Teach them how to save and they will be set for life.”
We teach our children many things throughout their lives. When they are young, we teach them how to read and write. We teach them how to play sports and how to take care of themselves. As parents, we can also teach them important lessons on how to save and invest. Instilling principles of saving for the future will help them for a lifetime. Most of us have worked hard and made sacrifices when we were younger so that we would have a nice nest-egg. We invested wisely and took advantage of the power of compounding. Over time, a small portfolio can grow much larger through disciplined savings and being patient through market volatility.
For our working children, we think Rule Number One is: spend less than you earn. I’ve had many people tell me this is impossible because of all the demands of modern life: cell phones, internet, expensive rent, gym memberships, Starbucks, etc. We all know there’s a balance between living for today and saving for the future. Shifting some of our consumption to savings is the best way to start. Getting into the “habit” of savings will yield long term rewards.
The savings tools available to our children are broader, and more complex than what was available to us in our young working careers. Many employers offer 401(k) plans, some with generous matching of employee contributions. Contribute as much as you can to the company 401(k) plan and always contribute to the level of company match. For people in the early stages of their careers, the portfolio in the 401(k) plan should be focused on equity for the highest returns over the long run. Other tax-deferred investing tools available are IRAs and Roth IRAs. Both give ways to save for the future through tax efficient vehicles. We are familiar with all the IRS regulations regarding these accounts and are happy to discuss them with you or your children. For younger workers, even your children with summer jobs, consider helping them start a Roth IRA. Contributions, up to 100% of earnings, will grow tax free and are never taxed on withdrawals. For the past few years, we counseled our own college aged children to start saving for their futures by funding their Roth IRAs.
Bruce often reminds us that his father gave him $2,000 to open an IRA with the condition that he would add to it every year. It was the largest gift his father ever gave him and turned out to be the best gift he could have given. The power of compound returns is impressive, especially when starting young. The chart shows that a person earning a $50,000 salary, saving 8% per year, will accumulate over $1 million by the time they retire at 65. Matching contributions in a 401(k) make the result even better.
Teach your children to save and they will be set for a lifetime! As part of the Lucas Capital family, your children are welcome to work with us even if they can’t meet our minimum investment thresholds. We have a long tradition of working with families from generation to generation and feel that it’s an important service we offer to our clients. Please give us a call if you would like to explore options for helping your children start planning for their future. Thank you for your trust in Lucas Capital. We always appreciate a referral to someone who might be interested in our services or is not receiving the personal advice that we offer. We stand ready to help you and your children with questions on savings, investing or financial planning.
- Wall Street Journal, 3/29/19, “U.S. Stocks Rise, Notching Best Quarter Since the Crisis”
- NYU Stern School, http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP .html
- JP Morgan, “Guide to the Markets, U.S.” 3/31/2019
NOTE: This report has been prepared for the discretionary account clients of Lucas Capital Management LLC (LCM) only and is not intended for the general public. The intention of this material is to provide the basis for investment decisions made by LCM on your behalf. The opinions expressed in this report are those of Lucas Capital Management. Information contained herein is based on sources we believe to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions are subject to change without notice. This report is for informational purposes only and is not intended as an offer to sell or a solicitation to buy securities. This report may not be reproduced or distributed without our permission and is a service provided exclusively for our clients. Lucas Capital Management and its affiliated companies and/or associated persons may, from time to time, have positions in, or options on the securities discussed herein and may make purchases/sales while this report is in circulation. More information is available upon request.