3rd Quarter Client Note

After a fitful bout of volatility during the month of August, including an 800 point one-day drop in the Dow Jones Industrial Average, the S&P 500 (Total Return) Index turned in a respectable 1.70% gain for the quarter. That brought the year-to-date return to an extraordinary 20.55%. (For context, the most recent 12-month return, which includes 2018’s dismal 4th quarter 13.52% loss, was 4.25%.)

Real estate was the best performing asset class, with the Dow Jones US Select REIT Index returning 6.83% for the quarter, brining its year-to-date return to 24.64%. International stocks once again underperformed, with the MSCI World ex USA Index losing .93%.

In the fixed income market, the Bloomberg Barclays US Aggregate Bond Index gained 2.27%, driven by the continued decrease in interest rates. The yield on the benchmark 10-year US Treasury Note fell 35 basis points to 1.66%; with interest rates actually turning negative in some parts of the world. That’s right, you have to pay to keep your money in the bank. But that’s another story.

Our indispensable friends at Dimensional Funds have all the numbers in their regular comprehensive Quarterly Market Review.

Free Trading is Not Free

In some interesting news that broke within the last week, following the lead of Charles Schwab, all of the major discount brokerage firms – including TD Ameritrade, ETrade and Fidelity – will now be charging zero commissions for trading stocks, options and exchange traded funds (ETF). This is down from a nearly-free $5 bucks a trade. There will still be ticket charges to buy and sell certain low expense open-end mutual funds, like Vanguard and Dimensional, whose sponsors refuse to pay for shelf space at the discount firms.

It’s hard to tell whether this is just a marketing gimmick or part of a blood war amongst the brokers. While it varies from firm to firm, commissions have, in any event, become a decreasing source of revenue over the years. But brokers have lots of hidden sources of revenue: 1) the aforementioned pay to play fees, 2) below market interest rates on cash sweep accounts, 3) payment for order flow from exchanges where your trades ultimately get sent and at which you may not get the best execution. (What good is it to save $5 on commission if you lose $50 on the bid/ask spread?), and 4) proprietary products. Just to name a few.

To my mind, I would prefer that firms charge what it costs to execute trades and be more transparent about the effects of those hidden costs on their customers’ investment experience.

And free trading doesn’t help investors – or even trading inclined advisors. It only encourages bad behavior. A real investor doesn’t do lots of trading. If you are somehow saving lots of money on trading because of this, then maybe you’re not a real investor.

The Seatbelt Sign Comes On Regularly

Three different days in August of 2019, in which the Dow Jones Industrial Average posted a 2 percent loss or gain, made that month the 13th-most volatile month since 1900. But hair-raising volatility occurs frequently; brought on by the news of the day. Or the hour. The essence of successful investing his having a plan to deal with it.

Just like an airline passenger, when the seatbelt sign comes on, there’s no way of knowing whether it will be on for just five minutes of moderate turbulence or whether the aircraft has unavoidably entered the cloud tops of 300 miles of thunderstorms. The only thing we know for certain is that the odds of catastrophe are low.

Almost daily I see articles in the mainstream press with titles like: How to Prepare for the Next Bear Market. When it comes to preparing for market turbulence the only viable strategy is to always be prepared. Make sure your portfolio has a balance of risky (stocks) return seeking asset classes and short to intermediate term high quality bonds – for ballast – consistent with your own particular needs, goals and risk appetite.

Your existing, well-thought-out-portfolio (along with a few deep breaths) is your best friend when it comes to coping with the ever-changing news.

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