It is time to try something new here at DRW Financial!  We are going to experiment with video updates to this blog for items that may benefit from a more interactive type of content.  To get the film rolling, today we have a short video explaining in basic terms what a financial plan is meant to be.

Investing is not a "one size fits all" pursuit.  Every person or family has their own highly individual concerns and goals, capacity and considerations.  But perhaps there are some allocations every investor should choose for their portfolios:

• Patience - It has become cliche to refer to investing as a marathon and not a sprint.  Or perhaps a lifelong journey.  As with all analogies, these are imperfect but they do at least point in the direction of reality.  For most investors, the largest goal is also the farthest away: retirement.  And if a goal is 20+ years away, patience in investing is a virtue.  The markets are volatile, and big swings up or down can test the resolve of the most disciplined savers and investors, but the historical record may suggest that those who make their decisions on the short term market view under perform those taking the longer view.
• Love - Yep, love matters in finance.  Too often, money operates in people's lives like this pile of numbers disconnected from our emotional and spiritual selves, when money has become in the modern world one of the primary outlets for the expression of our value systems.  At DRW Financial, when we develop a financial plan for a client, the conversation starts with a robust discussion of values, particularly those around family, community, and legacy.  The idea is that once we can identify and articulate what we truly love, those people and things that we really value, the desired composition of the financial plan becomes clear and the investing philosophy follows along.
• Charity - Closely related to the discussion of love and values above, charitable pursuits can be a meaningful piece of an overall investment plan.  Supporting a charity or non-profit can certainly bring financial benefits in terms of tax management, but also has the potential for wider impact.  Choosing a worthwhile charity can provide a family with a point of external focus and an opportunity for perspective.  The old saying goes "you can't take it with you," but you can certainly choose to multiply the benefits of money earned during life by allocating some to investments in community and helping others.
• Wisdom - We learn from our mistakes, we learn from those who are a little further along life's path, we learn by taking a deep breath and just observing the world around us...we are always learning but there is always more to learn.  Wisdom may very well be the acknowledgement that we do not know all there is to know.  The realm of investing is definitely one that requires humility and wisdom.  "The best laid plans of mice and men often go astray" is apt here, as the complexity of the markets and the unexpected in life conspire to wreak havoc on a financial plan.  Wisdom in financial planning may involve a wider discussion around values to determine which goals are most important, and which are least.  The conversation should address the possibilities of a stumble or breakdown in the plan, and what those events might look like, what impact they would have on the pursuit of goals.

Most investment portfolios are going to hold some stocks and bonds, mutual funds, maybe some real estate or insurance products, but if they do not have an allocation to Patience, Love, Charity, and Wisdom, do those portfolios really represent the values of their owners?

The equity markets continue to move upward at a pretty exciting clip this week.  Using the S&P 500 as a proxy for the overall market, current levels are more than 20% higher than one year ago:

20% seems like a big number, right?  I was curious how many times the S&P 500 had shown year over year gains of 20% or more, and so I did a little home work.  With an historical data file download for the index from Yahoo's Finance page, I pulled out the price of the index on the first market day in January for each year going back to 1950.  Using this subset of data and a simple spreadsheet calculation, I found that the S&P 500 had gained (from one January to the next) 20% or more 12 different times.  That's 12 times in 63 years.  If you loosen up the criteria a little to 10%, the number jumps to 32 times the index gained at least that amount in a year over the 63 years studied.

Of course, that means that there were many years that came in at less than 20% or even 10%.  Using only this January data, there were 47 years with a positive return of any amount, meaning there were 31 years with some gain but less than 10%.  And then there are the years with no gain or even a loss.

The worst yearly return for the data in this study was for the period between January 2008 and Jan 2009...

A year over year loss of 37.58%!  (in the Yahoo data, they show a number more like -40%).  But how common are double digit losses?  Diving back into the data, it looks like there were 3 instances of a year over year decline of 20% or more, and 7 instances of a 10% or greater fall.

What can we take away from this data?  There are a few concepts I would like to highlight:

• The markets are volatile.  While +/- 10% moves represent enormous swings in value, they occur with regularity.  Taken together, the years with 10% or higher gains and 10% and lower losses add up to 39 years out of 63 in the given study.
• Reducing 60+ years of data to only January prints may actually undersell the issue.  There is considerable volatility within a given calendar year that doesn't necessarily show up in the Jan to Jan data points.  For instance, within 2011 there was a wild variety of experience: From January to December, the S&P fell 1.1% on net, but from July to August fell ~ 11% and from September to October gained 16.7%!  The point here is that the experience of holding the index through these periods can feel quite volatile, regardless of the calendar year returns.
• Taking a simple average of the January to January data for 1950 to 2013 gives approximately 8.5%.  This is the kind of number often discussed in the press and financial literature, suggesting that someone with the capacity to buy and hold the index over a very many years would see their realized return shake out to a considerably positive number that bears little relation to the extremes of any one year.
• The past does not predict the future, and investors must thoroughly consider their own situation before making a decision on risk and acceptable volatility.  Too often people overlook the natural cycle of life, along with the related things that come up as we age and our circumstances change. Will there be another 10 - 20% drop in the S&P 500 in the coming years?  Almost certainly, the answer is yes.  But when will it come and what will the recovery look like is far less certain.

I think the Giving Pledge is a very positive thing, both for the very wealthy folks making the pledge and the people, projects, and communities that stand to benefit from the gifts.

This article describes how the founder of Spanx hosiery, Sara Blakely, is among a group of nine new members of the Giving Pledge group - way to go Sara!

For the past few years, dividend investing has been all the rage.  With the US Fed targeting low interest rates in a strategy to stimulate the economy, traditional income investors have been squeezed out of bonds and pushed towards other sources of cash flow.  As a proxy for the move in the larger bond market towards lower yields, consider this 5 year look at the 10 year treasury note:

For those investors on a "fixed income", such as a retirees depending on the wealth they accumulated during their working years to sustain them throughout the remainder of their lives, a drop in yield from around 4% down to 1.5% - 2% represented a significant challenge.  Is it any wonder that many of those investors began to explore other avenues for income?  For many of these people, dividend paying stocks appeared a good option.  Well known companies like General Electric and Johnson & Johnson were paying dividend yields at levels much higher than the US treasuries, and competitive with corporate bonds.  Here is a chart of the JNJ dividend yield over the last 5 years to contrast with that of the Treasury chart above:

From this view, the argument for dividend stocks versus bonds seems compelling.  And it may very well be that a diversified portfolio of dividend stocks with strong underlying economics could meet an investor's objectives for income and growth while meeting their tolerance for risk; however, there are downsides to dividend paying stocks.  Here are a few to consider when weighing investment options:

• Stocks are volatile.  While bonds have a defined term and are designed to mature at "par" at the end of that term, stocks are open ended investments and their price will bounce around considerably with any number of market influences.  This price movement can easily erode any value derived from the dividends, especially if the investor has to sell for liquidity during a "dip" in price.
• Dividends are discretionary.  Again, consider the contrast to bonds: the coupon and maturity on a bond are contractual; if the company fails to honor the terms of the bond, they are in default and the bond owners have legal recourse.  Dividends are at the discretion of the company's board; a company can suspend dividends at any time and for a variety of reasons.
• Dividends are volatile.  As mentioned above, a company can stop paying a dividend at time, and may also raise or lower dividends for a number of reasons.  During the fallout of the 2008 "great recession", General Electric cut their dividend substantially.  Below is a 10 year chart of the GE payout in $ per share:

Income investors holding GE stock through that period would have seen their cash flows drop significantly, from more than $0.60 per share down to $0.20, while also seeing their share price drop from a high in the $40s all the way down to a low below $7.50!  

To summarize, dividend paying stocks may be a reasonable fit for investors seeking income, but those stocks come with considerable risks and volatility that must be considered within the broader context of the investor's risk tolerance and investment objectives.