I sent off a request to clients and friends of the blog to see if they had any questions they wanted me to answer this month. Here are a few:
I read that a recession might be coming. Should I buy defensive stocks or even move my money to cash?
Depending on the source, you probably heard a recession was coming because of either new home sales slowing down, the yield curve inverting, an economic slowdown in Europe , or perhaps other reasons. And while these things are something we should keep an eye on, I’d be careful about using stories like this to make changes to your portfolio if you’re fearful of a recession. Why? Because predicting a recession in advance is damn near impossible. Per a recent post by Ben Carlson:
“The recession will probably start before you even know it. Many assume a recession is simply two consecutive down quarters in real GDP. The National Bureau of Economic Research (NBER) actually defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
And it can take time for NBER to reach that conclusion. The last recession began in December 2007 but they didn’t call it for another 11 months. The low point was June 2009, which was a point the committee determined 15 months later.
In fact, it’s taken NBER anywhere from 6 to 21 months in the past to determine economic peaks and troughs.”
That’s right, it requires looking back anywhere between 6 to 21 months to determine if we are in a recession. We may be in a recession right now for all we know. Also, forecasters can be very, very wrong. Back in 2011, an organization called ECRI (who had an impeccable track record of predicting recessions at the time), scared the crap out of everyone by saying “If the United States isn’t already in a recession now it’s about to enter one”. We were just coming out of the market turmoil in 2008-2009 and unfortunately this line of thinking was adopted by many in the investment world. As we know now, this was incorrect and those who sold out expecting to miss the next crash missed out on a massive gain in stocks.
If you want to learn more about how the economy works in relation to your investments, one of the best analogies I’ve ever heard about can be explained by walking your dog. I encourage all of you to spend 7 minutes watching this video Josh Brown from CNBC put out recently to explain more. I’ll wait.
I still believe it is likely that your biggest risk is not temporarily losing money in the stock market due to a recession or other factors, your biggest risk is running out of money in the future. More money has been lost avoiding corrections that corrections themselves. Holding onto a diversified investment portfolio that you can stick with is still the best way to play this.
Should I be using a target date fund in my company 401(k) or build my own portfolio?
Tough one – don’t want to punt this question but it really depends.
Target date funds are great in that they take a lot of the guesswork and oversight off the table when picking the investments for your 401(k). It really is as easy as picking a target date fund closest to your retirement date and adding to it every 2 weeks. Easy. For most people, this is usually enough. Where I do see issues sometimes are in 2 circumstances:.
- I’ve seen some target date funds that are absolute horror shows once you get under the hood. Sometimes they have double the fees than other funds available in the 401(k) plan, or have too much (or not enough) allocated to certain asset classes. It may be a better call to build your own in this circumstance if the other investments available in your plan are appropriate to do so.
- They really aren’t designed for your individual situation. You may be a younger investor with decades before retirement but can’t handle a big drawdown in your portfolio. You also might be approaching retirement expecting to collect a pension and have another 40 years of life expectancy. Do you really need your target date fund to have 50% of the portfolio in bonds?
So what should you do? It’s tough to make a blanket recommendation as there is so much variability from one plan to another. Some plans have 20-30 investment options available to choose from and some have less than 10. Some fund options perform well, some don’t. Some are cheap, some are expensive. We had clients recently where we recommended one keep their target date fund and one sell theirs to create their own allocation. My advice – lean on your plan sponsor to get more information about your investment options. They will be able to get you fees and performance on all of your fund choices and recommended asset allocations based on your risk tolerance. You can build a fairly diversified portfolio with as little as 4 funds depending on your plan. There are a ton of free resources out there to guide you including Fee X and Morningstar. Remember, if you do end up creating your own portfolio, have a plan on how often you will monitor your holdings, how often you will rebalance etc.
I heard I should be buying stocks that pay dividends. What are your thoughts?
First off, dividends are great. Dividends account for a bigger percentage of overall stock performance than most people realize. Over the last 25 years, the S&P 500 has had an annualized gain of 9.8%. Of that 9.8%, 7.7% has come from price appreciation with the other 2.1% coming from dividend payouts. So if 2.1% of returns has come from dividends over the last 25 years, why wouldn’t you just buy the stock of companies with much higher dividend payouts? A couple reasons:
One, dividend payouts aren’t nearly as popular as they once were. Some companies have been buying their stock back in lieu of paying dividends for some time now.
Two, if you just look for stocks solely based on a high dividend you may be buying a bad business. Think about how many people bought GE for their seemingly solid dividend only to wake up to see it cut to a penny per share when they uncovered that a number of their underlying businesses were in trouble. Stocks are not bonds, and stocks can cut their dividends at any time.
I still prefer to own a diversified portfolio that includes many different asset classes, including dividend paying stocks. If you do want to hunt for stocks that pay dividends, your best bet may be to find businesses that are both growing their dividend payout and buying back their stock, not necessarily solely paying a high dividend. A recent New York Times article names some funds that specialize in this.
Why do so many hockey players in the NHL play left-handed when the vast majority of the population are right-handed?
Excellent question! As some of you know, I’ve been playing hockey since high school and if you’ve ever paid attention to professional hockey, you might notice how many players shoot left-handed. According to nhl.com , of the 885 players that have suited up for an NHL game this year, 554 of them have shot left-handed – 62.5% of the league. This percentage has varied historically but on average roughly 2/3 of the league play lefty. Which seems strange given that roughly 90% of the population of the planet is right-hand dominant, right? So what gives?
For you non-hockey fans, left-handed shots put their right hand on the top of the stick and place their left hand toward the middle of the stick for leverage when passing, stickhandling, and shooting. So why so many left-handed shots in the NHL? I think it has to do with Canadians and baseball.
In the United States, most of us grow up playing baseball first. When we then gravitate to playing hockey at a later age, we assume that we should be shooting a puck the same way we swing a baseball bat. Most people swing a bat right-handed, so we end up grabbing a right-handed stick and start practicing our slap shot.
But the majority of the NHL players have historically come from Canada. In Canada, you are basically born with a hockey stick in your hand (I think they may issue them at the hospital). Imagine if you are a 2-3 year old kid picking up a stick for the first time it is probably more natural to grab it by the top with your dominant hand, which is your right (making you a left-handed shooter). Interestingly, in playing with hundreds of players throughout my life, the ones that grew up playing at a young age in Canada and other hockey-centric markets were overwhelmingly left shots. The ones who gravitated to hockey after playing baseball first – right shots.
*A quick aside, for those parents with children getting into playing the game…think right-hand defenseman. Trust me on this.
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