Looking Back: Flat Investment Markets for 2015

Flat. That’s probably the best way to describe the investment markets in 2015. -0.33% MSCI ACWI IMI, a benchmark of the global stock market

+3.01% Standard & Poor’s 500 Index, a benchmark of U.S. large companies

-0.41% MSCI USA IMI Value, a benchmark of U.S. value style stocks

-3.85% MSCI ACWI Ex USA, a benchmark of international stocks

-4.02% MSCI World Ex USA IMI Value, international value style stocks

-13.23% FTSE Emerging Markets All Cap, international emerging markets stocks

+0.97% Barclays U.S. Aggregate Bond Index, benchmark of U.S. taxable bonds

[Tweet "Stocks can drop 10% to 20% at any time without advance notice."]

Putting this in perspective, flat is not a bad thing given we have had nearly seven years without a major annual stock market decline of 10% or more, which is a long stretch. We are not forecasting a major stock market decline, but stocks can drop 10% to 20% at any time without advance notice. Like gravity, this principle has not been repealed.

There has been a huge performance differential between international and U.S. stocks, with international returns much lower. The pendulum of U.S. and international stocks was in favor of international stocks from 2002 to 2009 (seven of eight years). The pendulum has been in favor of U.S. stocks from 2010 to 2015 (five of six years).

Over the past 15 years, U.S. stocks have been superior in seven years and international stocks have been better in eight years. While we can’t predict the exact timing, the pendulum will swing back in favor of international stocks in the future.

Turning to news from our firm, we are pleased to introduce Kim Masco to you as our new Client Service Assistant, replacing Tricia Smith. Kim joins us from Macy’s, where she was an Executive Assistant in HR Finance, Benefits Administration and Health Plans. Prior to that she was Administrative Manager for a real estate development company. Kim’s email address is kim@bernofinmgt.com, and her telephone extension is #3. We look forward to introducing you to Kim!

Best wishes for a joyous and healthy holiday season!

As always, please contact us with any questions, news or comments.

Fun Facts Newsletter | December 2015

Flat. That’s probably the best way to describe the investment markets in 2015. -0.33%            MSCI ACWI IMI, a benchmark of the global stock market

+3.01%           Standard & Poor’s 500 Index, a benchmark of US large companies

-0.41%            MSCI USA IMI Value, a benchmark of US value style stocks

-3.85%            MSCI ACWI Ex USA, a benchmark of international stocks

-4.02%            MSCI World Ex USA IMI Value, international value style stocks

-13.23%         FTSE Emerging Markets All Cap, international emerging markets stocks

+0.97%           Barclays U.S. Aggregate Bond Index, benchmark of US taxable bonds

Putting this in perspective, flat is not a bad thing given we have had nearly 7 years without a major annual stock market decline of 10% or more, which is a long stretch. We are not forecasting a major stock market decline, but stocks can drop 10% to 20% at any time without advance notice. Like gravity, this principle has not been repealed.

There has been a huge performance differential between international and U.S. stocks, with international returns much lower. The pendulum of US and international stocks was in favor of international stocks from 2002 to 2009 (7 of 8 years).

The pendulum has been in favor of US stocks from 2010 to 2015 (5 of 6 years).

Over the past 15 years, US stocks have been superior in 7 years and international stocks have been better in 8 of the 15 years. While we can’t predict the exact timing, the pendulum will swing back in favor of international stocks in the future.

Turning to news from our firm, we are pleased to introduce Kim Masco to you as our new Client Service Assistant, replacing Tricia Smith. Kim joins us from Macy’s where she was an Executive Assistant in HR Finance, Benefits Administration and Health Plans. Prior to that she was Administrative Manager for a real estate development company. Kim’s email address is kim@bernofinmgt.com and her telephone extension is #3. We look forward to introducing you to Kim!

Best wishes for a joyous and healthy holiday season! As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | November 2015

October turned out to be a strong month for global stocks and not “spooky” at all. The MSCI ACWI IMI index of global stocks (you know, our favorite stock market index that no one has ever heard of) was up 7.5% for the month, recovering most but not all of the losses of August and September. The index was down 3.3% over the last 3 months. No one likes losses, but this loss is relatively modest for 3 months. Year-to-date 10/30/15, the index stands relatively flat at a positive 0.3% return.

U.S. and large company stocks continued to fare better than foreign stocks and U.S. mid and small company stocks. In October the S&P 500 was up 8.4%, S&P 400 Midcap index up 5.6% and S&P 600 Small cap index was up 6.1%.

One lesson learned in October 2015, as many times before, is that one can’t predict the short term direction of the stock market. But that doesn’t keep people from wanting to do so or trying and, more importantly, it doesn’t keep the media from making forecasts headline news. Like most free advice, it is best ignored.

Last month we wrote about low inflation and the news carried forward in October with announcements that there will be no cost of living adjustment increase in monthly Social Security checks in 2016. Likewise, the retirement plan contribution limits for IRA’s and 401k’s and other retirement plans will remain the same in 2016 as 2015; $18,000 for 401k contributions, $24,000 if you are age 50 or older.

Medicare premiums could have potentially increased for select individuals under this no Social Security cost of living increase scenario, but such an impact was negated by H.R.1314 The Bipartisan Budget Act of 2015.

The Bipartisan Budget Act of 2015 (don’t you love the name?) also made important changes to Social Security benefit claiming strategies for individuals near Social Security retirement age. Rather than try to summarize the changes here (and, quite frankly, we are still learning about them ourselves since it was just signed today), we will be reviewing the changes and their specific impact on individual clients on a one-on-one basis with you. Believe me; you don’t want to read a long explanation! But if you have any immediate concerns or questions, feel free to contact us directly.

Thanksgiving is one of my favorite holidays and I think the spirit of gratitude is so important. So enjoy the season of Thanksgiving and we sincerely thank you for the opportunity to serve you and for your confidence and trust in us. Happy Thanksgiving!!!

As always, please contact us with any questions or news or comments.

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October a Not-So-Scary Month for Markets

October turned out to be a strong month for global stocks and not “spooky” at all. The MSCI ACWI IMI index of global stocks (you know, our favorite stock market index that no one has ever heard of) was up 7.5% for the month, recovering most but not all of the losses of August and September. The index was down 3.3% over the last three months. No one likes losses, but this loss is relatively modest for three months. Year-to-date 10/30/15, the index stands relatively flat at a positive 0.3% return.

U.S. and large company stocks continued to fare better than foreign stocks and U.S. mid and small company stocks. In October the S&P 500 was up 8.4%, the S&P 400 MidCap index was up 5.6%, and the S&P 600 SmallCap index was up 6.1%.

One lesson learned in October 2015, as many times before, is that one can’t predict the short-term direction of the stock market. But that doesn’t keep people from wanting to do so or trying, and more importantly, it doesn’t keep the media from making forecasts headline news. Like most free advice, it is best ignored.

[Tweet "Like most free advice, media forecasts are best ignored."]

Last month we wrote about low inflation, and the news carried forward in October with announcements that there will be no cost of living adjustment increase in monthly Social Security checks in 2016. Likewise, the retirement plan contribution limits for IRAs, 401(k)s and other retirement plans will remain the same in 2016 as 2015—$18,000 for 401(k) contributions, $24,000 if you are age 50 or older.

Medicare premiums could have potentially increased for select individuals under this no Social Security cost of living increase scenario, but such an impact was negated by H.R. 1314, the Bipartisan Budget Act of 2015.

The Bipartisan Budget Act of 2015 (don’t you love the name?) also made important changes to Social Security benefit claiming strategies for individuals near Social Security retirement age. Rather than try to summarize the changes here (and, quite frankly, we are still learning about them ourselves since it was just signed Monday), we will be reviewing the changes and their specific impact one on one with our clients. Believe me; you don’t want to read a long explanation! But if you have any immediate concerns or questions, feel free to contact us directly.

Thanksgiving is one of my favorite holidays, and I think the spirit of gratitude is so important. So enjoy the season of Thanksgiving, and we sincerely thank you for the opportunity to serve you and for your confidence and trust in us. Happy Thanksgiving!

As always, please contact us with any questions, news or comments.

Fun Facts Newsletter | October 2015

Kids get sick. It rains on vacation. Your favorite team loses a close game. Life happens. The stock market goes down. It happens.

Stock market downturns happen often and they are painful but not fatal.

As reported by Dimensional Fund Advisors, the S&P 500 declined 12.35% from May 21 to August 24. Declines of greater than 10% are generally called “a correction.”

U.S. large cap stocks have had 28 corrections since 1926 with an average of -14.26%.

International large cap stocks have had 9 corrections since 2001 with an average of -13.33%.

International emerging markets stocks have had 15 corrections since 1999 with an average of -14.04%.

Here are the annualized compound returns for the years after the corrections:

Asset Class Next 1 Year Next 3 Years Next 5 Years
U.S. Large Cap +23.56% + 8.89% +13.33%
Intl. Large Cap +24.73% +12.69% +12.89%
Intl. Emerging Markets +42.33% +13.36% +11.20%

  History is history and averages are averages and there are no guarantees. But investing is a contrarian process and it is best to be holding and buying when everyone else is selling.

Meanwhile, income from stocks tends to grow over time. Here are the quarterly stock income increases for September 2015 vs. 2014 for some commonly held funds:

Vanguard Total Stock Market Fund Up 9.3%
Vanguard 500 Index Fund Up 8.6%
Vanguard Dividend Appreciation Fund Up 15.2%

  Low interest rates continue to pose a challenge, with the U.S. Treasury Note 10-year rate at about 2.0%. The Federal Reserve Bank is expected to raise rates in 2015.

Good news continues in a remarkably low inflation rate. While it may not seem like it, inflation was only 0.33% for the 12 months ending August 31, 2015. For the past five years it has averaged 1.80% per year, which is remarkably low compared with a 3%+ longer-term average. Beating inflation over a long time is the most important investment benchmark.

As always, please contact us with any questions or news or comments.

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Downturns Are Painful, but They Aren't Fatal

Kids get sick. It rains on vacation. Your favorite team loses a close game. Life happens. The stock market goes down. It happens.

Stock market downturns happen often and they are painful but not fatal.

As reported by Dimensional Fund Advisors, the S&P 500 declined 12.35% from May 21 to August 24. Declines of greater than 10% are generally called “a correction.”

U.S. large cap stocks have had 28 corrections since 1926 with an average of -14.26%.

International large cap stocks have had 9 corrections since 2001 with an average of -13.33%.

International emerging markets stocks have had 15 corrections since 1999 with an average of -14.04%.

Here are the annualized compound returns for the years after the corrections:

Asset Class Next 1 Year Next 3 Years Next 5 Years
U.S. Large Cap +23.56% + 8.89% +13.33%
Intl. Large Cap +24.73% +12.69% +12.89%
Intl. Emerging Markets +42.33% +13.36% +11.20%

  History is history and averages are averages and there are no guarantees. But investing is a contrarian process and it is best to be holding and buying when everyone else is selling.

Meanwhile, income from stocks tends to grow over time. Here are the quarterly stock income increases for September 2015 vs. 2014 for some commonly held funds:

Vanguard Total Stock Market Fund Up 9.3%
Vanguard 500 Index Fund Up 8.6%
Vanguard Dividend Appreciation Fund Up 15.2%

[Tweet "Beating inflation over a long time is the most important investment benchmark."]

Low interest rates continue to pose a challenge, with the U.S. Treasury Note 10-year rate at about 2.0%. The Federal Reserve Bank is expected to raise rates in 2015.

Good news continues in a remarkably low inflation rate. While it may not seem like it, inflation was only 0.33% for the 12 months ending August 31, 2015. For the past five years it has averaged 1.80% per year, which is remarkably low compared with a 3%+ longer-term average. Beating inflation over a long time is the most important investment benchmark.

As always, please contact us with any questions or news or comments.

Fun Facts Newsletter | September 2015

August provided a great “back to school” lesson for long-term investors. Risk and return are related (the 3 R’s); stocks have greater returns but higher risk.

Investors may have forgotten this because the global stock market, as measured by the MSCI ACWI IMI, has enjoyed positive gains for five of the last six calendar years (down 7.89% in 2011) since the global financial crises in 2008. While the MSCI ACWI IMI was down 6.7% in August, it has a more modest loss of 3.23% year-to-date August 31, 2015. No one likes to lose money, but a 3.23% loss should not be as painful as the media thinks.

Five years or longer should be the best time period to measure your investments, and the five-year historical return ending August 31, 2015, on the MSCI ACWI IMI was 9.83%. Remember that!

Here are a few other “Fun Facts to Know and Tell” right now:

China has captured front-page news about a slowing economy, but its economy has averaged 8% to 10% growth since 1980 (as high as 15%) and has “slowed” to 7% with forecasts that it may slow to 6%. Compare that with the U.S. plugging along at 2%+ (just recently bumped up to the 3%+ range), and it puts the world in perspective.

U.S. exports to China total less than 1% of U.S. gross domestic product (or GDP—the measure of economic output).

The Dow Jones Industrial Average fell more than 10% in five days in August, which is a dramatic but rare decline. Here are the number of trading days it took to recover from previous 10%+ losses in five-day periods:

1987 Black Monday 419 trading days (about 14 months)
1998 Russia default 48 trading days
9/11 attack 40 trading days
2008 financial crises 304 trading days (about 10 months)
2011 U.S. govt. downgrade 62 trading days

  Finally: Gains and losses are only real when you sell; otherwise they are just paper.

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | August 2015

What will happen to my bond funds when interest rates increase? This is a very common question from investors. The Federal Reserve has not increased interest rates since 2006, so long ago that most people don’t remember it.

Fortunately, as long as any future interest rate increases are slow and gradual, the answer to the question is, “Not much!” In fact, a slow and gradual increase in interest rates could be good for savers and investors, as long as the inflation rate does not increase faster than interest rates.

Why is “Not much!” the answer to this basic investing question? In a simplified explanation, as long as we have a positively sloped interest rate curve where longer term bonds earn higher interest than shorter term bonds, bond prices increase as they get closer to maturity and may do so enough to offset an interest rate increase. For example, over a 5 year range, U.S. Treasury Notes now earn about 1.75% for a 5 year maturity, 1.50% for 4 years, 1.15% for 3 years, 0.70% for two years and 0.25% for one year. The year over year difference is 0.25%, 0.35%, 0.45% and 0.45% respectively. So when a 5 year bond purchased today at 1.75% becomes a 4 year bond one year from now, assuming interest stay the same, it will be priced higher than a new 4 year bond priced at 1.50%. If interest rates go up 0.25%, pricing will be about the same.

If we have two interest rate increases of 0.25% over the next 12 months, the effect on bond prices may be negligible. Even if rates go up 1% over the next 12 months, bond investors would eventually benefit from the higher interest rate income. If we have a 2% increase in interest rates in a 12 month time period, bond fund investors could lose 5% to 10% of principal value, but that would be recouped by higher interest income over time.

While trying to make this all sound simple, remember that the real measure of investment returns is relative to inflation. Buying a 15% CD in the early 1980’s wasn’t very beneficial when inflation was 13%. Compare that to a 1.5% CD today when inflation is near zero; about the same. The real measure of investment returns is relative to inflation so given our very low inflation rate of 1.76% per year over the last 5 years and 1.20% over last 3 years and -0.23% over the last one year (negative inflation means deflation) ending June 30th, earning 1.5% to 2.5% from bond funds still keeps investors ahead of inflation without stock market risk. Hope that helps you sleep well!

Enjoy these final summer days!

As always, please contact us with any questions or news or comments.

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Confirmation by the Numbers

The latest numbers exemplify what we've written about investing before: Don’t chase last year's best performers. Remember instead that consistency is important.

Fun Facts Newsletter | July 2015

I love data. Especially data from reliable sources (not everything you read on the internet is true!). I love data even more when the data confirms and supports our investment strategy. So even though as recently as May 2015 “Fun Facts…” we wrote about the lack of consistency and persistency in mutual fund performance, the Standard & Poor’s Corporation recently published new research on the same subject. Before jumping in to the “Fun Facts” numbers, you may be asking yourself, “Why is this important and what does it mean to me?” It is important evidence in the on-going debate of active vs assive management (stock pickers vs index or asset class investors) and therefore answers the question, “What is the best way to invest my money?” We hope you agree that is an important question.

Now for some numbers as of March 31, 2015…

Of U.S. stock funds as of March 31, 2011 that were in the top 25% of best performers...

...only 31% were still in the top 25% after one year

...only 5% were still in the top 25% after two years

...only 1% were still in the top 25% after three years

...only 0.28% were still in the top 25% after four years

Moral of the story: don’t chase last year’s best performers. Consistency is important. We look for funds in the top half of relative benchmark comparisons and strive to avoid funds in the bottom 25%, although consistent funds may dip in the bottom periodically. This is why we use market index funds from The Vanguard Group and asset class funds from DFA (Dimensional Fund Advisors). They will have good consistency and their low fees contribute to strong relative performance over time.

For you real trivia buffs, the Dow Jones Industrial Average finished the first 6 months of 2015 down 1.14%, breaking a four-year streak of positive first half gains. Don’t take it as too much of a predictor, though. In 118 years of Dow Jones Industrial Average history, a negative first half was followed by a negative second half only 40% of the time. For the first six months of 2015, the best day was up 323 points or 1.84% and the worst day was down 350 points or 1.95%. This is proof that daily volatility doesn’t affect long term investors as it all averages out over longer time periods.

Enjoy your summer days (and long days)!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | June 2015

As high school and college students and their families celebrate graduations, the focus quickly turns to the next stage of life. For high school students transitioning to college and college graduates transitioning to the real world, this is a prime opportunity to emphasize learning about basic personal financial planning. There are many resources but two that we are familiar with are “Personal Finance in Your 20’s for Dummies” by Eric Tyson. It is available on Amazon and part of the yellow book cover “….for Dummies” series that seems to cover everything. This book covers a broad range of financial topics such as basic budgeting and planning, insurance, loans, investments and how to save money on major purchases. One can read it from cover to cover or just the chapters that cover relevant topics, so it can be used as a quick reference book. The book is educational and does not sell any products.

Another resource is Dave Ramsey which offers complete information at DaveRamsey.com. His organization sponsors the “Financial Peace University” hosted at many churches. The site offers a “Graduate Survivor’s Guide” and an “Every Dollar” software program that tracks expenses and helps with budgeting.   Granted this site and program has more marketing flair than I’d like to see but that’s the nature of the beast.

The best teacher is parental guidance and encouragement and “teaching by example.” Certainly the key is getting young adults off to a good start and building a base of knowledge for a lifetime of financial security and success.

Turning to investments, we have written in our 2014 recap that international stocks have lagged U.S. stocks for the past few years, dramatically so in 2014. As diversification would dictate, the pendulum has turned in 2015 and international stocks have outperformed U.S. stocks substantially. Our crystal ball is no clearer than yours and we don’t know how far the pendulum will swing and when it will swing back but, in the meantime, diversification continues to serve you well!

Lastly, back to kids and young adults, remember that a Roth IRA is a great long term saving vehicle and can be funded by parents or grandparents up to 100% of employment income up to $5,500 that the child earns in a job. So if you fund a Roth IRA starting with their first job they can accumulate a substantial retirement plan at an early age. This is a great introduction to the importance of saving and basic principles of investing. Sounds like a win-win! Let us know if we can be of help.

Enjoy these lovely early summer days (and long days)!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | May 2015

Over the years we have frequently written about two important principles in mutual fund selection as part of the portfolio management process:

  1. Most funds don’t beat a market benchmark over time
  2. Fund winners rarely continue to be winners

Dimensional Fund Advisors recently published updated research supporting these principles. Here are the humbling facts.

On January 1, 2010, a mutual fund investor had 4,255 stock funds to choose from. Five years later only 24% had outperformed their respective benchmark.

On January 1, 1995, a mutual fund investor had 2,955 stock funds to choose from. Ten years later only 18% had outperformed their respective benchmark.

On January 1, 1990, a mutual fund investor had 2,711 stock funds to choose from. Fifteen years later only 19% had outperformed their respective benchmark.

Do winners keep winning? The answer is no, and the results over 3, 5 and 10 year periods are fairly consistent in the 25% range.

For the five years from 2010 to 2014, from the previous time periods ending in 2009, only 25%, 26% and 28% of the three, five and ten year winners repeated successfully.

Moral of the story: buy index funds in multiple asset classes for broad diversification.

Speaking of forecasting, one of the stock market’s popular fables is “Sell in May and go away” based on the fact that May to October has historically been the worst 6 months of the year for the stock market. As reported in USA Today, since 1950 the Standard & Poor’s 500 index has averaged a 1.7% gain from May through October vs a gain of 13.9% for the November to April period. But slicing and dicing the data further, as done by Ari Wald, a technical analyst at Oppenheimer, the S&P 500 tends to perform better in May, June, July and September when it’s in an uptrend, as it is now, heading into the summer months. What’s more, stocks tend to rally into September in the third year of the four-year presidential cycle, especially in pre-election years with a sitting second term president like President Obama. Investors who sold in May 2014 missed out on a 7.1% gain for the next 6 months. All of this supports our mantra that our crystal ball is no clearer than yours and predicting the short term direction of the stock market is easier said than done!

As always, please contact us with any questions or news or comments.

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Don't Believe in Diversification? Check Out This Research

Over the years we have frequently written about two important principles in mutual fund selection as part of the portfolio management process:

  1. Most funds don’t beat a market benchmark over time.
  2. Fund winners rarely continue to be winners.

Dimensional Fund Advisors recently published updated research supporting these principles.   Here are the humbling facts.

On January 1, 2010, a mutual fund investor had 4,255 stock funds to choose from. Five years later, only 24% had outperformed their respective benchmark.

On January 1, 1995, a mutual fund investor had 2,955 stock funds to choose from. Ten years later, only 18% had outperformed their respective benchmark.

On January 1, 1990, a mutual fund investor had 2,711 stock funds to choose from. Fifteen years later, only 19% had outperformed their respective benchmark.

Do winners keep winning? The answer is no, and the results over three-, five- and 10-year periods are fairly consistent in the 25% range.

For the five years from 2010 to 2014, from the previous time periods ending in 2009, only 25%, 26% and 28% of the three-, five- and 10- year winners repeated successfully.

Moral of the story: Buy index funds in multiple asset classes for broad diversification.

[Tweet "Predicting the short-term direction of the stock market is easier said than done."]

Speaking of forecasting, one of the stock market’s popular fables is “Sell in May and go away” based on the fact that May to October has historically been the worst six months of the year for the stock market. As reported in USA Today, since 1950 the Standard & Poor’s 500 index has averaged a 1.7% gain from May through October vs. a gain of 13.9% for the November to April period. But slicing and dicing the data further, as done by Ari Wald, a technical analyst at Oppenheimer, the S&P 500 tends to perform better in May, June, July and September when it’s in an uptrend, as it is now, heading into the summer months.

What’s more, stocks tend to rally into September in the third year of the four-year presidential cycle, especially in pre-election years with a sitting second-term president like President Obama. Investors who sold in May 2014 missed out on a 7.1% gain for the next six months.

All of this supports our mantra that our crystal ball is no clearer than yours and that predicting the short-term direction of the stock market is easier said than done!

As always, please contact us with any questions, comments or news. You can email me at bruce@bernofinmgt.com or call 513-474-9191. I’m always happy to hear from you!

A Snapshot of Top Performers

This month we are providing a snapshot summary of the S&P 500 top 10 performers for 2014 and 2013. Did you own the top 10 best-performing stocks last year? (Yes, you did!)

The best-performing stocks can go up over 100% or more.

Mathematically, the worst one stock can do is minus 100%.

So a few stocks going up more than 100% can outweigh the few that go down 75% or more.

Not owning the top 10 stocks represents an "opportunity cost" that contributes to active managers underperforming a broad stock-market index.

As the charts show, the names and industries of the best-performing companies change over the years.

S&P 500 Top 10 Performers

S&P 500 Top 10 Performers

Chances are, the best-performing companies in the future will be names we aren't familiar with today.

[Tweet "The best-performing companies in the future will be names we aren't familiar with today."]

As always, please contact us with any questions, comments or news. You can email me at bruce@bernofinmgt.com or call 513-474-9191. I'm always happy to hear from you!

Fun Facts Newsletter | April 2015

For "Fun Facts..." this month we are providing a snapshot summary of the S&P 500 Top 10 Performers for 2014 and "Why a Broadly Diversified Index Fund Should Be the Core of Your Portfolio": "Did you own the top 10 best performing stocks last year? " (Yes, you did!)

The best performing stocks can go up over 100% or more.

Mathematically, the worst one stock can do is minus 100%

So a few stocks going up more than 100% can out-weigh the few that go down 75%+.

NOT OWNING the top 10 performing stocks represents an "opportunity cost" that contributes to active managers under-performing a broad stock-market index.

The names and industries of the best performing companies change over the years. Chances are the best performing companies in the future will be names we aren't familiar with today.

S&P 500 Top 10 Performers

S&P 500 Top 10 Performers

Happy Easter!

As always, please contact us with any questions or news or comments.

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Fun Facts Newsletter | March 2015

March marks the 6 year anniversary of the bottom of the stock market in March 2009 after the 2008 global financial crises. Since then we have had 6 years of positive U.S. stock market returns, which is unusual.

Remember that we invest for "future expected returns" and "past returns are no guarantee of future performance". Investing is like driving a car. We can't drive by looking in the rear view mirror. We must scan the horizon through the much bigger and broader windshield.

One measure of U.S. stock market valuation, the Cyclically Adjusted Price Earnings Ratio (CAPE), devised by legendary value investors Benjamin Graham and David Dodd in 1934 and popularized more recently by Yale University professor and Nobel Laureate Robert Shiller, shows the U.S. stock market at the high end of historic valuation ranges. Put more simply (if that is possible for financial concepts), the U.S. stock market price is high relative to earning or profits of U.S. corporations and it is profits that drive prices.

What does this mean?  It does NOT mean that a U.S. stock market crash is imminent. It DOES mean that future return expectations should be lower than long term averages. But many factors are involved. If U.S. corporate profits grow more strongly as the result of a stronger economy, then the U.S. stock market may perform better than CAPE indicates. Stronger employment and wage growth have been two elusive factors in this economic recovery which may pleasantly surprise us in the near future.  As always, no one has a clear crystal ball and, as always, broad diversification is our best strategy. Note that all of the above information applies to U.S. stocks and international stocks, which have not risen nearly as much as U.S. stocks in the last 6 years may prove to be good sources of diversification.

One final thought: Identity theft continues to grab front page headlines, especially as we enter income tax filing season. Major corporate data breaches have provided a fertile ground of personally identifiable information.  The Internal Revenue Service is reporting an increase in the number of fraudulent income tax returns filed, where someone gets a taxpayer's Social Security Number and files an income tax claiming a refund. Not having criminal minds, we are not exactly sure how they do that and get away with it, but they do. Once again, we urge you to take seriously the multitude of steps that are available to protect your personal information, including careful management of passwords for the many websites we all use in today's society.

As always, please contact us with any questions or news or comments.

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