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How the Market Works

How Do You Like Me Now?  2 Weeks After Brexit: How the Market Works

Posted by kdadmin on July 12th, 2016.

How Do You Like Me Now?  2 Weeks After Brexit:  How the Market Works

Help me out. Sometimes I can be too blunt.

Three weeks ago, I met an up and coming fellow in the financial field. He worked for a competing firm. We talked about how I ran my business, what was happening in the market and, broadly speaking, how we were investing our own, and our clients money. I tried to be the old warhorse helping the new guy along.

I told him I was out of stocks entirely, carried large bond and cash stakes, and had avoided the international sector like the plague. He looked at me like I had two heads. I could see the “big firm party line ideology” in his eyes and tried to explain. He had read my blogs but “disagreed,” holding fast to the big firm party line. Which I think meant something like 40% domestic stock, 30% foreign stock, 20% bonds, the rest in cash. We agreed to stay in touch.

Can you guess what my next email to him will say?

How Do You Like Me Now?

This might be why I often don’t seem to play well with others in my field …

(Though, it was funny to see how President Obama enjoyed a similar comment during his spot on the Late Show with Jimmy Fallon.)

If you look at the chart above, you’ll notice that in the three days immediately after the UK’s vote to leave, US stocks tanked by over 5%! Foreign stocks dropped by 14%! Whereas US bonds went up by 1%. More interesting, is that two weeks later, even with the stock markets’ recovery US bonds are still ahead by nearly 1% over US stocks and 10% over foreign stocks. This is how the market works.

So I’m guessing, my roughly 60% US bonds / 40% cash stake looks pretty good right now …

People often don’t invest in bonds because they don’t understand them. But I bet they can understand a 1-10% better performance with 80% less volatility risk …

So, Which Phone Call Would You Prefer to Make?

You know, maybe the best piece of advice I can give to my up and coming financial friend would be to paint him a picture, to help him imagine what’s at stake.

  1. Imagine you are me. (Terrifying I know.)
  2. Imagine you are managing tens of millions of dollars for your clients.
  3. Imagine that for most of them, you are managing their entire life savings.
  4. Now, imagine that you have call up one of your retired clients. One who has entrusted all of their money to you.

Which phone call would you prefer to make?

  1. “Hi, Brexit happened. We didn’t see it coming, you lost 5% in three days. You lost 14% in your international holdings in those same three days because of the change in exchange rates. Sorry.
  2. “Hi, Brexit happened. We weren’t sure what was going to happen, but haven’t seen much upside in the market for awhile, so we kept you in bonds and cash. When the stock market tanked, you made money. When it recovered, you made more. This is how the market works. Go play outside, you’re money is safe.

Live the Life You Love: Fiduciary

If you were a client, which phone call would you prefer?

Which do you typically experience?

While I have a fiduciary obligation to my clients (the legal obligation to place their needs ahead of my own), I believe I also have an ethical obligation to show you how to structure your finances to Live the Life You Love.

While I’m happy I avoided the Brexit market gyration, and actually came out ahead, I’m MORE happy that doing so meant that all those people under my care could continue to live the life they love, unfettered by the events in Britain. After all, THIS is the most important part of being an advisor. Helping people accomplish their personal goals. To help them self actualize by freeing them from anxiety about money.

I think that many financial firms forget that. Focusing instead on the technical, hyper rationalization of market events. At the end of the day, it isn’t about absolute returns. It’s about absolute happiness. It’s about knowing that you can go live the life you love!”

The Next Step?

Learn about bonds. Start here.


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