Adam Zuercher

CPA, Certified Financial Planner, and Wealth Management Advisor based in Findlay, Ohio

7am Saturday #28 – The best weekly gain in stocks since 2009!

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7am Saturday is a weekly email I send at 7am every Saturday where I share brief and relevant thoughts on money or investing. Enter your email address below to subscribe:

7am Saturday

March 28, 2020

Good morning!

It was another crazy week that included a big bounce in the stock market, a record number of unemployment claims, and a $2 Trillion economic stimulus package.

Market Update

+ The S&P 500 bounced back this week and posted the best weekly performance since March 2009.

+ The S&P 500 is on pace for the worst month since 2008.

You get to choose the headline because either one works!

+ This week’s rebound in the market was fueled by optimism that the U.S. government spending $2 Trillion on an economic relief package will mitigate the impact of the coronavirus outbreak.

Here’s how the week went for the S&P 500…

  • Monday: -2.93%
  • Tuesday: +9.38%
  • Wednesday: +1.15%
  • Thursday: +6.24%
  • Friday: -3.37%

…overall, the S&P 500 finished this week up +10.20%.

Not a bad week on a stand alone basis. However, we need to put this week’s performance in context with the past 5 or 6 weeks. Until this week we hadn’t had two up days in a row since early February. In other words, the market was way oversold and due for a bounce. The question now is, was the low on Monday the bottom of this bear market, or is there another leg down to come? Only time will tell, but in my opinion we will see another selloff before this bear market is over. There’s just too much bad news to come in the next few weeks. Although the market is already anticipating this bad news what remains is a high degree of uncertainty around the duration of the COVID-19 shutdowns and the extent of the economic impact.

An Update on COVID-19

Let’s take a look at what’s happened in the U.S. over the past week…

Here’s a look at where we were as of last Friday night (3/20/20):

…and now a look at where we are as of Friday evening (3/27/20):

More than 5X the cases in one week!

I’ll reiterate this statement from last week: “Clearly the pandemic is spreading throughout our own country. The economic impact will be felt for months to come.”

Total cases around the world now exceed 550,000 with deaths topping 27,000. It’s very likely we will see more than 400,000 cases in the U.S. by next weekend.

+ What concerns me the most is “the curve”. Here’s a graph showing what the curve looks like for different countries during the first 42 days with more than 100 confirmed cases in that country:

The steepness of the curve is a reflection of how fast the virus spreads. As you can see, it’s not looking good for the U.S. which has the steepest curve on the graph at this point in the cycle.

Things can change quickly, but seeing the number of cases in major metropolitan areas like New York City is a cause for concern. Los Angeles isn’t far behind as models show they could experience a surge similar to what NYC has seen within about 5 days.

This past week, President Trump started to change his tone saying he wants to see us back to work and in churches by Easter (April 12). This doesn’t seem realistic to me. Easter is just two weeks from tomorrow, and I’m guessing we won’t see much flattening of the curve by then. (I hope I’m wrong.) We may have had a better chance if the whole nation came together and committed to social distancing and only allowed essential businesses to remain open.

As I’ve said before, we must take this threat seriously. Do I like shutting businesses down, cancelling events, and sheltering at home? Absolutely not! But, I do want what’s best when it comes to attacking this virus and slowing the impact on our health.

Testing and isolation will remain essential for stopping the spread of the virus. Watch this interview with Bill Gates for more information on why this is so important.

Economic Update

+ The biggest economic news of the week was that 3.3 Million Americans filed for unemployment benefits last week. That number is nearly 5X the prior record in 1982:

One thing you should know about initial (new) jobless claims is that the trend in the number of unemployment filings is inversely related to the direction of the stock market. Check out this chart to see how this worked during 2008 and since then:

In 2008, unemployment peaked at 10% before trending down to a 50-year low of 3.5% just before COVID-19.

So, where is unemployment headed from here? Well I have to believe we will see some more big numbers for jobless claims over the next few weeks. The median estimate for Q2 is around 7%, but it wouldn’t surprise me to see 10% or more unemployment this year.

+ With unemployment rising and businesses shutdown just how hard will the economy decline? Estimates are all over the board as this one is very hard to predict, but some of the most bearish estimates include a quarterly decline in GDP of as much as 25-30%!

Bear Market Brews

This past Thursday, we hosted our first virtual happy hour in a new series called, Bear Market Brews.

​ You can watch the replay here.​

During our live chat we discussed:

1️⃣ The current status of COVID-19

2️⃣ The government intervention we’ve seen from the Fed as well as the new stimulus package approved by the Senate

3️⃣ An economic update including our thoughts on today’s report that 3.3 million workers filed for unemployment last week (a new record!)

4️⃣ Forecasts for this year’s economic output (GDP)

5️⃣ A review of prior bear markets of 30% or more declines in the stock market and what to expect going forward

6️⃣ A review of indicators we are looking to be more confident that this bear market has found the bottom

7️⃣ Tips on things you should do to improve your financial position during this crazy environment

We also spent some time providing answers to some great questions submitted by our listeners. As you can see we covered A LOT! We will be back again next Thursday, April 2nd. Please join us!

More info at the link below 👇

​https://hzcapital.com/bmb​

The CARES Act

Today, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act”. The Act makes emergency supplemental appropriations and other changes to help the nation respond to the coronavirus outbreak. I’ll have more details for this next week, but I’ve already attended a webinar covering the changes and it is likely that most Americans will benefit in some way from this economic stimulus package.

Positive News of The Week

One thing I hope to do throughout this pandemic is share some of the positive news I’m hearing. One big letdown has been the lack of effecient COVID-19 testing. Abbott Labs is about to change that. Abbott is unveiling a test that can tell if someone is infected in as little as 5 minutes. The test is small, portable, and can be used in almost any health-care setting. Abbott plans to supply 50K tests a day starting 4/1.

Weekend Links & Resources

+ The Coronavirus (COVID-19) Pandemic & Bear Market Updates – This is worth mentioning again. This page is a curated list of all the client updates our firm has published. This page will continue to be updated throughout the bear market. Bookmark this page and check it often as we intend to frequently communicate our thoughts to current clients and potential clients.

+ COVID-19: How to Exercise Control During These Crazy Times (The Everyday Advisor)

+ Your Weekly COVID-19 Update (The Invested Dads Podcast)

I hope you find some time to unwind and relax this weekend. I’ll take some time to watch some Netflix tonight (hit reply to give me some suggestions) and then tomorrow I’m looking forward to my favorite hour of the week…our online church service. If you don’t have a church, or if your church doesn’t have an online service, then I encourage you to check out CedarCreek. The messages and music the past two weeks have been perfect for the occasion and the online production is excellent!

Have a great weekend,

Adam

↩️ PS – If anytime you get an email from me and you want to share a comment or ask a question, simply hit ‘reply.’ I read every email, and try my best to respond.

📧 PPS – Thank you for all the feedback on these emails. I’ve had an overwhelming amount of positive replies to my new weekly email. If you’re finding these emails helpful, please forward them to your friends. Or, you can always direct them to 7amSaturday.com to sign up.

7am Saturday #27 – Brace yourself. But, this too shall pass!

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7am Saturday is a weekly email I send at 7am every Saturday where I share brief and relevant thoughts on money or investing. Enter your email address below to subscribe:

7am Saturday

March 21, 2020

Good morning! Well, what can I say? I guess I’m just glad it’s Saturday. The past week was clearly one of the more difficult week’s of my career. I will write about some of it today, but there’s no way I could capture everything in a brief email as it seemed like I lived a month over the past week!

Market Update

+ The S&P 500 fell 15% this week, it’s worst weekly performance since October, 2008. The S&P 500 closed the week at 2304.92, it’s lowest level since February 2017. The index is now down 32% from its February 19th high.

The S&P 500 also closed below the “Christmas Line” of 2,351, the bottom of the 2018 correction reached on Christmas Eve 2018.

Here’s how the week went for the S&P 500…

  • Monday: -11.98%
  • Tuesday: +6.00%
  • Wednesday: -5.18
  • Thursday: +0.47%
  • Friday: -4.34%

…overall, the S&P 500 finished this week down -15.01%.

+ All three major U.S. stock market indices are now more than 30% below their all time highs:

  • S&P 500: -32%
  • Dow Jones Industrial Average: -35%
  • NASDAQ Composite: -30%

Understanding the Health Threat of COVID-19

​Here’s a video that documents what’s happening in one town in Italy. Italians want to send a warning to the rest of the world. (Warning: There are some disturbing scenes of some critically ill people in this video.)

It’s time for our nation to take this threat seriously. I think we’ve made a lot of progress over the past 10 days, but I also see pockets of the country that have yet to go on lockdown. I live in Ohio, and we are fortunate to have a Governor who has been at the front of the curve. He has made some unpopular decisions. And that’s why I admire his leadership. He is leaning into the facts. COVID-19 is a deadly disease, and we must get in front of it to “flatten the curve”.

Do I like shutting businesses down, cancelling events, and sheltering at home? No! But, I’m afraid it’s the only way we can stop the outbreak from overtaking small towns like Bluftton, Ohio (population 4,400) which is just down the road from me.

​Check out this video that Dr. Ross Kauffman, an epidemiologist from Bluffton, created this video to clearly show why it’s so important to take action now by practicing social distancing and sheltering to flatten the curve.

If Ohio is on lockdown why not ask the whole country to unite and do this together? Let’s go all in and beat this!

I get frustrated when I see that here in Ohio we are taking the right steps to get in front of this, but down in Florida spring breakers are mocking the whole thing. Drinking Coronas on the beach and ignoring the warnings. Let’s unite as a nation and go on lockdown for 30 days and put this whole thing behind us!

Even Elon Musk, CEO of Tesla, intitially downplayed COVID-19, but is now willing to manufacture ventilators in Tesla’s factories if there is a shortage (very likely).

Understanding the Economic Impact of COVID-19

If you’re in a state like Ohio you have probably seen by now the first hand impact that lockdowns will have on the economy. You can’t shut everything down for too long without seeing a big hit to economic growth.

​Billionaire investor, Bill Ackman, was on CNBC Wednesday morning with his outlook for the economy. He really painted a worst case scenario. He’s asking President Trump to shut down the nation for 30 days. Note that Mr. Ackman does believe that we are headed down the right path, so he’s actually buying stocks right now because he believes we will ultimately do the right things to beat this virus.

If you want to understand the math behind the exponential growth of the coronavirus then read this. Or, I can simplify it for you from the following table on my Bloomberg terminal:

  • 15,973 confirmed cases in the U.S. (as of Friday)
  • Over the past 5 days the change in the number of cases has been increasing by 43% per day.
  • So, the number of cases 5 days ago was just 3,037.
  • We have had not one, but more than two doubles in the number of cases over the past 5 days.
  • At this rate, 7 days from now, we will have over 195,000 cases in the US.

Here’s a look at where we are as of late Friday night:

So, clearly the pandemic is spreading throughout our own country. The economic impact will be felt for months to come.

Passive Management Will Fail You in Bear Markets

Over the past decade there has been a huge shift to passive investment portfolios. So many active managers have underperformed the benchmark that investors have decided it’s no longer worth it to try to “beat the market”. Investors have concluded they are better off owning the whole market rather than trying to beat a benchmark. It’s simpler and easier to just own the benchmark and get the average return of the stock market. But is that the best approach?

For example, do you really want to own the S&P 500 Index fund in this market? You will own all 500 stocks in the index. It doesn’t matter how strong they are financially, what events are hurting their business, or whether their business has a growing market share or a declining market share. You just simply own all 500 stocks that some committee at Standard and Poors decided to include in the index.

Now think about that. Do you reallly want to be an investor in Boeing stock during a time like this? First, the company had trouble with it’s 737 MAX airplane which had production suspended in March 2019 after two new airplanes crashed within five months of each other. Now, Boeing is struggling as airlines around the world have grounded flights due to COVID-19 related travel bans. As I right this, I see they have suspended their dividend. Now, as an investor in an S&P 500 index fund you automatically own Boeing stock. But, if you are an active investor, or if you invest with an active manager, you don’t have to own the stock. Please note that this is not a recommendation for you to buy or sell the stock. I’m just making the point that you may, or may not, want to own a company like Boeing in your portfolio. (I do have an opinion, and if you are a client you know what it is.😃)

Now, more than anytime over the last decade, you want to understand every company in your portfolio. You want to know if the company is poised to weather this economic downturn, or if it is at risk of losing massive economic value.

Seeing how many people followed the trend into passive portfolio management I’ve concluded this may be an unpopular opinion. I know I have at least one prominent investor who sees the same thing I’m seeing. Last summer, The Big Short investor, Michael Burry, called a bubble in passive investing.

Our Monday Moves

Over the past weekend, I put together a 14-page research report titled, Bear Market Brain Dump – Weekend #1. The week prior we officially entered a bear market. The reality around the COVID-19 outbreak began to set in, and the data wasn’t looking good. Being in Ohio and seeing the state shut down events and businesses before others in the nation enabled us to see the economic impact first hand.

+ The key points of my research that I shared with my team on Sunday were:

  • The coronavirus pandemic and the underlying economic consequences are changing rapidly. Wherever you look economic activity is shutting down, and I expect it to remain shut down for at least the next 4 weeks. Essentially the only retail left open will likely be supermarkets, grocery stores, pharmacies, gas stations, and take-out food. We are likely witnessing the biggest economic demand shock in the shortest period of time in our lives.
  • Because current events are unprecedented for Americans, it will fuel the type of uncertainty, fear and feeling of powerlessness that results in either total paralysis or massive over-reactions.
  • Being the first “social media pandemic” of our times I believe that the over-reactions will be much greater than most expect.
  • Being in Ohio we may be ahead of the crisis curve as Ohio’s governor seems to be leading the way. NYC seems to be right behind us. Talking to a friend in Georgia it seems other parts of the country haven’t yet taken the measures we have. I think they will within the next week.
  • I don’t expect the V-shaped recovery some are calling for. Yes, when the recovery happens, I think it will be a dramatic snapback, but I also think the bottom of the crisis could look more like a “U” than a “V” and hopefully not an “L”.
  • We are an active firm, and I feel it’s our responsibility to stay ahead of the curve. Just as our State Governor DeWine is working to stay ahead of it and “flatten the curve” from a health side, I feel the responsibility to take any action we can to “flatten the financial impact” and avoid a major drawdown to our client’s portfolios.

+ And then the conclusion:

“This report is not meant to be alarmist, but realistic. You know I’m normally bullish on the economy and stock market. While in the near-term I have turned bearish, I’m still optimistic long-term. Once we get beyond the crisis there could be some very good economic times ahead. There will be some amazing opportunities. Everything that’s happening, and my outlook for some tough times ahead is TEMPORARY. Everything will reopen. This is not the end of days. The U.S. is not going out of business. When life as we know it changes as fast as it has in the past week it’s hard to remember that. Better days are ahead!”

+ Bottom line: I expected things to get worse before they get better. But, yes, eventually we will pull through this just as we always do.

So, we called an early morning meeting last Monday to discuss the data and determine our approach as a firm. By the time the market opened we had made our decision to take a defensive approach in our client portfolios and trades were underway.

​Here is the video we sent to our clients Monday evening.

An Unpopular Approach

Most financial advisors are continuing to recommend that clients ride out the downtrend. While that’s not necessarily bad advice for a long-term investor, I do believe that it is possible to capture less downside during major bear markets while still participating on the upside once the recovery begins.

I say this from our own firm’s experience in 2008. That year was the only other year in the history of our firm where we took a defensive position to hedge the downside while waiting for the market to give us some signs that an uptrend was coming.

We always tell our clients to assume that we are going to be fully invested at all times and that they should expect their portfolio will track the ups and downs of the markets. However, if we have conviction that things will get worse we will take some steps to hedge the downside. And that’s exactly what we did this past Monday.

The data we’ve continued to receive throughout the week validates our thesis. However, it is important to know that markets will begin to bottom and rebound well before the obvious signs are bottoming. So, as a result we’ve been hard at work all week monitoring our dashboard of indicators that we will be watching to know when to go back to playing offense in our client portfolios.

This is not a strategy I recommend to individual investors. We have tools that most individual investors don’t have. We have a whole team monitoring the situation, and we have the ability to act quickly. In short, we do this for a living, and it’s our full-time job, so we are equipped for this.

Only time will tell if our approach works in this bear market. If you’re interested in following our thinking then stay tuned. We have an exciting announcement coming next week about an opportunity for you to follow our thinking a bit more closely.

Some Positive News

One thing I hope to do throughout this pandemic is share some of the positive news I’m hearing:

  1. The first human trial is underway for a COVID-19 vaccine. The testing process is moving along at an unprecendented pace.
  2. More than 100 public utilities have agreed to keep water flowing. The companies will not cut off water to homes that fail to pay their water bills during the coronavirus crisis.
  3. We may see a 10-minute testing kit that could be a game changer. A U.K.-based company and a Senegalese research institute are developing 10-minute coronavirus testing kits that can be manufactured for $1.
  4. Hydroxychloroquine & Azithromycin as a COVID-19 treatment may be the gamechanger we are looking for! See the chart below, which shows the combination of an antimalarial & an antibiotic and the outstanding successful results from this combination of drugs:

Source: Gautret et al., 2020.

Your Weekend Resources

+ The Coronavirus (COVID-19) Pandemic & Bear Market Updates – This is a curated list of all the client updates our firm has published. This page will continue to be updated throughout the bear market. Bookmark this page and check it often as we intend to frequently communicate our thoughts to current clients and potential clients.

+ Wesbury 101: The Coronavirus Contraction – Here’s a great video from Brian Wesbury with a more bullish view.

As I said last week, I continue to believe that the next 3 weeks are going to be unlike anything we’ve experienced in modern history. It’s likely to stay difficult for some time to come, but just as it has every time in the past, the market will eventually bounce back from this. It may not be quick, but eventually we’ll get there!

Take care of yourself and enjoy the extra family time. Thanks for reading!

Have a great weekend,

Adam

↩️ PS – If anytime you get an email from me and you want to share a comment or ask a question, simply hit ‘reply.’ I read every email, and try my best to respond.

📧 PPS – Thank you for all the feedback on these emails. I’ve had an overwhelming amount of positive replies to my new weekly email. If you’re finding these emails helpful, please forward them to your friends. Or, you can always direct them to 7amSaturday.com to sign up.

The Coronavirus…What Should Investors Do Next?

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The rapid spread of the coronavirus (COVID-19) outside of China sent the U.S. stock market down last week over rising concerns that the coronavirus will impact the global economy. Last week the S&P 500 had the worst one week drop since 2008. Here’s how the week went…

  • Monday: -3.35%
  • Tuesday: -3.03%
  • Wednesday: -0.38%
  • Thursday: -4.42%
  • Friday: -0.82%

At the close on Friday, February 28th we had a -12.76% drawdown from the all time high set by the S&P 500 on Wednesday, February 19th. This -12.76% drop in seven trading days is one of the fastest corrections we’ve seen.

What’s not unusual though, is that a -13% drawdown happens almost every year. The chart below shows that the S&P 500 has had an average intra-year decline of -13.8% over the past 40 years.

In percentage terms, the drawdown we’ve had this year isn’t even as large as the 20% correction we saw in the 4th quarter of 2018, yet it feels worse because the correction happened over seven straight down days.

The speed of the losses and the constant stream of news about the virus in the media is enough to scare anyone. Last week was a humble reminder that the definition of volatility means we will have to experience pullbacks, corrections, and bear markets along our journey to build wealth. History has shown that markets never go up and to the right in a linear fashion. 

But the headlines we saw last week, just days from all-time highs in the market, were enough reason to confuse investors. What should you be doing? With this rapid turnaround in market direction and fears that the coronavirus will turn from an epidemic to a pandemic, should you be taking action? If so, what sort of actions should you take? 

Paralyzed, confused, and fearful; investors are asking themselves what they should be doing next.  Is it time to sell and go to cash to ride out the storm, or is this actually an opportunity to buy? Confused by the correction, many investors are even turning to Google for help.  

All I had to do was type “should I” in a Google search and the top two predicted searches that appeared next were:

  1. Should I buy stocks now?
  2. Should I sell my stocks?

Nobody really knows how long the coronavirus threat will last. As you wait it out, it’s scary seeing your account balance take a daily hit. The drawdowns are shocking following a year where the market was up 30%+. You were already getting used to that new high watermark you hit just a week ago.

Research tells us that it’s human nature to have a greater emotional reaction to a drawdown than you do a gain of the same size. Loss aversion is an important concept associated with an economics theory developed by Daniel Kahneman and Amos Tversky called prospect theory. Loss aversion suggests that people express a different degree of emotion towards gains (happiness or pleasure) than towards losses (stress or pain). It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining.

The pain and anxiety we feel during market downturns is the price we pay for the superior returns that can be made in the stock market.

Nevertheless, investors are unsure of their next move. It’s human nature to have a fight-or-flight response when we experience a market decline as quick and steep as last week’s loss.

Just take a look at the recent spike in Google’s search trends:

Should I buy stocks now?…

Should I sell my stocks?…

Is The Panic-Selling Justified?

If you look at the facts we’ve seen about the coronavirus (COVID-19) the stock market selloff seems like a big overreaction. While I don’t claim to know exactly how bad the coronavirus epidemic will get, it seems that the decline in stocks last week was just as a function of panic-selling over fears of what could happen rather than over what is happening to the trajectory of the economy.

That doesn’t mean selling is over. While a number of indicators would suggest forward returns from current levels should be pretty good, further declines in the near-term cannot be ruled out.

In this environment, investors are best-served by accepting and ignoring volatility, rather than taking it as a signal of an inevitably worse outcome.

Here are some things to consider:

+ The economy remains fundamentally strong. Over the past two weeks my view view for the US economy hasn’t changed. Americans are working, their incomes are rising, and their balance sheets are strong. As a result, the US consumer is in good shape financially and will continue to be a key driver to growth.The job market remains very strong with a historically low unemployment rate of 3.6%.

+ The Fed cut interest rates by 0.50% this morning. Federal Reserve Chairman Jerome Powell said the coronavirus outbreak had increased risks to the U.S. economic outlook, prompting the central bank to deliver an emergency rate cut.

+ The rate of new cases and deaths in China is slowing.

+ The U.S. stock market now has valuations that look extremely cheap compared with bonds. As of last Friday, the dividend yield on the S&P 500 (1.81%) was higher than the yield you can get from a 30-year Treasury bond (1.65%, a record low). With the exception of the darkest days in the financial crisis in 2008, this scenario is unprecedented. It is has certainly never been seen when the U.S. stock market is only 9 days removed from an all-time high:

My Outlook From Here

An interactive map from Johns Hopkins Center for Systems Science and Engineering and data from Worldometers allows you to see the spread of the coronavirus in real-time. I don’t claim to have any idea how far this outbreak will spread, or how many lives it will claim, before it is brought under control.

However, I know that many of the world’s leading doctors, virologists and epidemiologists are working on treatments and vaccines. I believe that their combined efforts and human ingenuity will ultimately succeed. Clearly, this is just my opinion based on the knowledge and technology we have available.

My belief that this is just a temporary problem and setback for the market is also based on the history of similar outbreaks in the past 20 years.

Consider past epidemics like:

The first day of these 5 epidemics was January 31, 2003 which was the beginning of the SARS epidemic. On that day the S&P 500 closed at 855.70.

17 years and 6 epidemics later (including the current one), on Friday, February 28, 2020 the S&P 500 closed at 2,954.22 points which is nearly 3.5 times higher! The market is resilient as it has recovered from any and all declines from past epidemics.

Like all other viruses in the past I expect that the coronavirus will eventually dissipate.

So What Should I Do With My Investments?

Bottom line: This is not a time to panic! Don’t let fear drive your investment decisions. Stay focused on your financial plan. Keep calm and stay invested.

This decline we are going through is within normal ranges of stock market volatility. If history has taught us anything about investing, it’s that declines like these are temporary and the price we have to pay for the long-term premium returns of the stock market.

The truth is nobody knows what the market will do as we endure the coronavirus epidemic. I think Carl Richards illustrates a plan of action so well in this sketch:

Things You Can Control

While you can’t control the daily moves in the market you can control how you react. Instead of selling stocks in a downturn and turning your paper losses into real losses, consider turning downturns into opportunities.

How you react to your emotions.

Your emotions are telling you to sell right now. As markets go down, it’s human nature to fear losing money. As you watch TV or read about the spread of the coronavirus you will see a lot of red. You will hear about worst case scenarios. It’s scary. Very scary! Remember that fear is often what drives people to making the biggest mistake of their lives. I lived through this in 2008 and 2009.

Tips For Overcoming Fear

  1. Turn off the TV. The media is in the business of gaining viewers and selling ads. Fear sells.
  2. Hire a financial advisor. If you don’t have an advisor you should. A good financial advisor is there to coach you through times just like this.
  3. Focus on the positive news. Things like new treatments, vaccines, decelerating rates of new cases and deaths, etc.
  4. Look at what’s happened over the past 5 epidemics in the past 20 years. In every case, the epidemic passed and the market not only recovered, but eventually went on to new highs.
  5. Recognize that uncertainty is always part of investing in stocks. Look at the current bull market since 2009 as an example. The S&P 500 is up 431% in spite of the many reasons to sell along the way:
  6. Look at long-term charts. When investing in the market, the longer your time horizon, the lower your probability of losing money. Instead of looking at short-term performance during a correction or bear market, look at past corrections in the context of a longer time horizon.

Things That Matter

What matters most when it comes to investing? The short answer is: your goals.

If you’re not retired yet, a pullback is a gift. It’s an opportunity to buy when investments are on sale. If you were buying a month ago, now is an even better time. If you have some extra cash, now is a great time to put it to work. Here are a few things you can do that matter to your financial plan:

  • Invest that cash you’ve been keeping on the sidelines for a time such as this.
  • Increase your 401(k) contributions.
  • Consider tax loss harvesting while being mindful of wash sale rules.
  • Make a contribution to your kids’ 529 plan.
  • Accelerate Roth IRA conversions.
  • Accelerate backdoor Roth IRA contributions.
  • Refinance your mortgage.

If you are retired, then your portfolio should be prepared for a typical correction or bear market. Now is not the time to abandon your investment strategy. This correction is no different than past corrections. The worst thing you can do is sell when markets are down.

Conclusion

You wouldn’t be human if you didn’t fear loss. Smart investing can overcome the power of fear by focusing on relevant research, solid data, and things you can control. Investors who can tune out the news, focus on their long-term goals, and turn declines into opportunities are better positioned to succeed with their investment strategy. Stay calm, focus on the things you can control, and those things that will help you achieve your goals. The odds are quite high that in 2030 you can look back at this moment and be thankful that you resisted the urge to make emotional decisions in times of market turmoil.

How To Create Wealth

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“When can I retire?”

Whether it’s in my conference room meeting with clients, or in a casual conversation with friends, this question seems to come up on a regular basis.

The thought of retirement sounds appealing to many people. I get it. You are looking forward to the day where you don’t have to answer to anyone. You imagine what life would be like if only you didn’t have to be tied to a schedule, and you could go to the beach, go golfing, or help a friend in a moment’s notice. 

What you really want may not be a life of full retirement, but the financial resources to make work optional.  You want to know that if things aren’t working out in your current job, you can take some time off to figure out what you want to do next. You want to know that if stress is taking a toll on your health you can find a job that’s a little less demanding and more flexible. You want to know that if you want to take a one-year sabbatical you can do so without it terrorizing their finances for the rest of your life.

So, what does it take to make work optional? 

Wealth.

The next question is:

“How do I create wealth?”

What is wealth?

Before I show you how to create wealth let me define it for you.

Merriam-Webster defines “wealth” as an “abundance of valuable material possessions or resources” or having “abundant supply” of something.

Who wouldn’t want to have an abundance of financial resources or an abundant supply of money?

For many people, talking about the accumulation of financial assets and resources is uncomfortable or brings negative emotions with it. You may have grown up hearing that money is evil or you may believe that the “rich” have taken advantage of others to gain that status. If that sounds like you, I’d suggest that these are limiting beliefs that have been programmed into your thinking by the messages you’ve heard from others.

Money is just a tool. A tool that’s no different than your car, your lawnmower, or the hammer in your toolbox. Yes, money can be used for evil. But, it can also be used for good. Any tool is only as good as the motives behind the person using it.

Money can be used to buy time and more time equals more freedom for you. Time is the one resource that is limited. You have 24 hours in a day and 7 days a week. 

Now that we’ve established that you are using your wealth for good, let’s get on to the principles of wealth creation. These principles are actually pretty simple, but not always easy.

8 Principles for Wealth Creation:

1) Invest in yourself.

Investing in yourself is the best and most important investment you will ever make. In your quest to create an abundant life always start with you. An investment in yourself will compound faster and reward you more than any other investment you could ever make. 

You are your own greatest asset. So, how can you improve you? Focus on the following areas:

Be healthy.

You need to be healthy to be wealthy. People  who are healthy physically, spiritually, and mentally are likely to make more money. Furthermore, you’re more likely to be able to enjoy your wealth if you’re healthy. It seems that being healthy is a challenge in today’s culture of busyness. Focus on your habits and create daily rituals that will set you up for success.

Never stop learning.

The world is constantly changing and evolving. To get wealthy, don’t stop learning after graduating from school. The best part about learning after we get out of school is that we can focus on learning more about the things that interest us. No one is telling us what to study. Commit to a lifetime of learning. Pursue the things that interest you. Get curious about the way things work.

Leverage your Unique Ability.

Discover your strengths. Take assessments and personality profiles to learn more about yourself. Once you discover your strengths spend as much time as possible sharpening your skills in those areas. Look for ways to use your Unique Ability in all that you do. When part of a team, seek to understand others’ unique abilities too, so that together you can achieve more.

Establish Atomic Habits.

Habits are the foundation of your success. In his book, Atomic Habits, author James Clear points out that a 1% change doesn’t take much on a daily basis, but over time will compound to the point where you can achieve massive results. Here’s what James has to say:

“An atomic habit refers to a tiny change, a marginal gain, a 1 percent improvement. But atomic habits are not just any old habits, however small. They are little habits that are part of a larger system. Just as atoms are the building blocks of molecules, atomic habits are the building blocks of remarkable results.”

“Habits are the compound interest of self-improvement. Getting 1 percent better every day counts for a lot in the long-run….The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them.

“[Habits] seem to make little difference on any given day and yet the impact they deliver over months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.”

Your future net worth will depend on the habits you establish today.

2) Create something. 

The world rewards creators. When you boil it all down, there are really only two types of activities: 1) consuming things, or 2) creating things. 

There’s nothing wrong with consuming, but it’s the creators who get rewarded. 

If you want to create wealth you first have to create something special. 

Go create something. Create value for your employer. Create a product, a business, a service, a blog, a podcast. Write a book. Start a YouTube channel. 

When you contribute something to the world it will reward you. Not only that, but creativity compounds. As you create things you are proud of that people happily consume, it will inspire you to create more. Creating is fun!

3) Save half of your raises.

There is ONE simple thing you can do to build more wealth without sacrificing your current lifestyle. It doesn’t matter how much money you already have saved, or what your current income is. This strategy can take anyone from no wealth to significant wealth if applied consistently and without fail for 20 years.

Here’s how it works:

STEP 1 — Draw a line in the sand today. Make today’s income your “baseline”. Continue living as you are without sacrificing your current lifestyle.

STEP 2 — For every dollar you earn above the baseline from here on out you will: SAVE half of it and SPEND half of it. 

By giving yourself permission to spend half of every raise, it also feels much easier to save. It’s a balanced approach to enjoying your life today and building wealth for the future.

Here’s a quick example. According to the Census Bureau the 2018 median U.S. household income was $63,179. To keep things simple let’s say your income was $65,000 in 2019. Let’s assume that since you are committed to investing in yourself regularly and creating things that have value your income will grow 10% a year. Here’s what saving half your raises would look like over the next decade:

By following The 50/50 Rule of Future Raises, the increases to your standard of living are much more controlled and your lifestyle expenses rise much more slowly. If you follow this rule, your savings rate (% of income saved) will grow every year while your spending rate (% of income spent) actually declines as your income grows!

This is how people retire early or make work optional while still enjoying a rising lifestyle! The only difference to your lifestyle is that the increases to your standard of living aren’t as big and fast. That’s not a bad trade-off for actually being able to retire someday within a reasonable timeframe, and with a stream of income that covers your standard of living.

A quick note to anyone still in school: Imagine you are just starting your career, and you just landed your first job out of school. If you are able to save 50% of your income you will give yourself a very quick on-ramp to financial freedom. If there’s one thing I wish I would have done differently early in my career it’s save more money!

4) Invest in the stock market. 

Take a look at the Forbes list of richest people in the world. Do you see a common thread? Most of these billionaires have created their wealth through a business they started. Or, in the case of Warren Buffet (and others) by investing in great businesses. What’s the takeaway? The two most common ways of creating wealth are to:

  1. start a business with a unique product or service (be an entrepreneur), or
  2. invest in great businesses (be an investor).

Anybody who wants to be an entrepreneur should certainly give it a shot. However, being an entrepreneur isn’t for everybody. The far simpler approach to building wealth is to be an investor.

The stock market makes it possible for anyone to be an investor. There are plenty of great businesses that are publicly traded giving you an opportunity to build wealth using the same methods as the world’s richest billionaires.

Here are some tips when thinking about which stocks to own:

  • Invest in financially strong businesses. Learn how to read financial statements. You want to own profitable companies that are growing their earnings.
  • Stay in your circle of competence. You want to own companies that have products, services, and business models that you understand. You should be able to explain their business to a sixth grader. 
  • Look for companies that have a competitive advantage. This could be a unique product or service, large market share, or a powerful brand.
  • Include companies that pay dividends and increase them regularly. Dividends are a distribution of profits to shareholders. Dividends prove that earnings are real. Dividend income also helps cushion downside market volatility.
  • Invest in companies that are participating in large economic trends or themes. (See Principle #6)

5) Embrace the right risks. 

All investing has some form of risk. You’ve likely heard before that without some risk there is no reward. As the saying goes, “No pain. No gain!” 

Learn as much as you can about the different types of risk when investing. Although there are many other risks, there are two competing risks you must understand: Inflation Risk & Volatility Risk.

Inflation Risk

Inflation is the reality that the cost of almost everything increases over time which means that the purchasing power of your money is also decreasing over time. So, if you want your wealth to grow in a way that you can maintain our standard of living (purchasing power) you must invest in a way that exceeds the rate of inflation.

Volatility Risk

Volatility is the measure of variance of returns from the average. In most cases, the riskier an investment, the higher the volatility. So, stocks, which I’m advocating you own to build wealth, have much more volatility than cash or bonds, which are not as likely to produce returns that exceed inflation. 

People will tell you that stocks are risky. Yes, that’s true. But, the real risk is losing purchasing power with your money. Also, keep in mind that the longer your time horizon, the less likely it is to lose money with a well-diversified portfolio of stocks. 

6) Study the future.

Watch trends, learn about new technologies, and make some bets on new innovations that will change the world over the next 10 or 20 years. 

Here are some examples from the past decade:

  • Mobile Technology: Over the past decade anyone who embraced the power of mobile as an investor likely did well. Think about the companies that benefited the most. Companies like Apple (AAPL), Google (GOOGL), and Qualcomm (QCOM). Take a look at their stock charts to see that the market rewards innovation. 
  • Software as a Service (SaaS): Years ago software companies made money by selling their software for a one-time licensing fee. Anytime they released major upgrades or new versions they would have to convince people to upgrade and they would charge an upgrade fee. Over the past decade software companies that have transitioned their licensing structure to ongoing subscription models have flourished. Recurring revenues from software subscriptions are a great business model with more predictable cash flows and “stickier’ customers. Two great examples of companies who’ve successfully made this transition are Microsoft (MSFT) and Adobe (ADBE). 
  • Cashless Payments: Fewer people use cash than ever before. Mobile technology and the internet have enabled much more convenient ways to pay for stuff. Anyone who recognized this trend over the past decade did very well investing in companies like Mastercard (MA), Visa (V), and Paypal (PYPL).

Areas to focus thinking on in the next decade or two:

  • More SaaS: Software is eating the world, and as mentioned above SaaS companies have great business models.
  • Everything as a service (EaaS): Cloud computing subscriptions are evolving beyond software to include communication, infrastructure, data and platforms.
  • Subscriptions and Memberships: These are the new business model. Recurring revenue is king for business. This business model works for nearly anything including software, food, cars, clothes, media, and phone upgrade programs.
  • Cars and Trucks: Nearly every auto manufacturer is working on electrifying their cars. In addition to electric vehicles the future of transportation is autonomous (or driverless) vehicles. Leading the way is Tesla, but all of the other major auto manufacturers are working on similar projects. There will be huge economic implications. What will this do to energy companies? How about the insurance business? Will driverless Uber and Lyft cars replace taxis? What companies stand to benefit the most? What companies will become obsolete?
  • Artificial Intelligence (AI): Computers and machines have the ability to think and learn. Surely there will be some big opportunities to invest in the companies who are leveraging AI.
  • Healthcare: People are living longer than ever before thanks to breakthroughs in technology and healthcare. Companies with the mission of improving our quality of life stand to benefit the most. Look for companies that are making age 100 the new age 65. Nobody wants to live forever unless their quality of life remains strong.
  • Blockchain & Cryptocurrencies: Blockchain is the underlying technology for currencies like Bitcoin. It’s early, but blockchain has the same transformative power that the internet has had. Those who understand this technology and it’s uses will have an opportunity to invest early. Will cryptocurrencies replace fiat money? Time will tell. It would pay to study the cryptocurrency philosophy by reading Satoshi’s Bitcoin white paper.

The future is changing faster than you think. The biggest opportunities for stock market investors will be in the companies that are in the thick of all the major changes ahead. There are unlimited ways to learn more about how the world is changing. My favorite resource is the work of Peter Diamandis. Start with his podcast and then check out his book, The Future Is Faster Than You Think.  

7) Be patient. 

There is no such thing as an overnight success for most people. Some get very lucky and end up at the right place at the right time (first in at a startup). Some hit a home run or several with their investments. For most people it will take a minimum of 10 years to begin to see the exponential results that come with the power of compounding. Give it 20 years to see the massive results you really want. Not just financial compounding, but also the compounding you will see by consistently investing in yourself and focusing on getting 1% better every single day.

Honestly, I hate the word patience. I’m not naturally a very patient person. I like words like FAST and QUICK, but when it comes to building wealth it happens much slower than you’d like. 

The hardest part of building wealth is the patience required during the first 10 years. The first decade is the hardest because it takes time for compounding to do its thing. Stay focused on the trajectory. As long as you consistently have tiny gains in your self improvement and your net worth you can have confidence that the future will pay off. 

8) Manage your emotions.

The biggest threat to your wealth will be your own emotions. In the pursuit of wealth people are known to make some very poor decisions. These decisions are typically driven by one of two emotions: fear or greed. 

Fear

This emotion is most common in down markets. When the market is down 30% you aren’t going to feel so good about your investing. In fact, fear will start dominating your thoughts. The fear of losing all your money is quite powerful. If you have a well thought out and disciplined investing strategy losing all your money is also quite unrealistic.

Greed

This emotion is most common when the stock market is really hot. It’s also common when a certain stock or investment has a very fast and big surge in price (think Bitcoin or more recently Tesla). The interesting part is that greed is often also driven by fear, or FOMO. That is the Fear of Missing Out.  People are vulnerable to greed when they hear stories about their friends making more money than they are. They want in on the action too!

Sketch by Carl Richards

Long-term, real life financial outcomes aren’t only driven by investment performance, but also investor behavior. Learn how to manage your emotions so you don’t make the big mistake of selling when fearful or buying when greedy. Many investors have failed trying to manage their emotions on their own. You will increase your odds of success by having empathetic, but tough-loving, behavioral guidance from a financial advisor.

Conclusion

The trajectory of your journey will not always be up and to the right. You will have obstacles and setbacks along the way. You will endure economic recessions, stock market corrections, and bear markets. The key is to focus on progress, gratitude for what you already have, appreciation for the people and relationships that are part of your life’s journey, and fulfillment from your life’s work.

Don’t make the mistake of thinking that wealth is a destination. Becoming wealthy is a journey. Enjoy the process, and you will enjoy retirement.

#AskAdamZ – Episode 009 – With the Stock Market at All-Time Highs Is This a Bad Time To Buy Stocks?

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#AskAdamZ 009 Market at Record Highs

#AskAdamZ is a series of live videos I’m doing on Facebook. You ask your questions on money, investing, or saving for retirement, and I’ll give you my answers.

Send me your question or use the hashtag #AskAdamZ on social media.

Here’s today’s episode where I answer the question: With the market at new all-time highs is this a bad time to buy stocks?

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