The Lange Report - October 2015

The Lange Report - October 2015

Table of Contents

 

Should Investors Sell After a "Correction"?
By guest author and former Lange Money Hour Guest, Weston Wellington

Stock prices in markets around the world fluctuated dramatically for the week ended August 27. On Monday, August 24, the Dow Jones Industrial Average fell 1,089 points -- a larger loss than the “Flash Crash” in May 2010 -- before rallying to close down 588. Prices fell further on Tuesday before recovering sharply on Wednesday, Thursday, and Friday. Although the S&P 500 and Dow Jones Industrial Average rose 0.9 percent and 1.1 percent, respectively, for the week, many investors found the dramatic day-to-day fluctuations unsettling.

Based on closing prices, the S&P 500 Index declined 12.35 percent from its record high of 2130.82 on May 21 through August 24. Financial professionals generally describe any decline of 10 percent or more from a previous peak as a “correction,” although it is unclear what investors should do with this information. Should they seek to protect themselves from further declines by selling, or should they consider it an opportunity to purchase stocks at more favorable prices?

Based on S&P 500 data, stock prices have declined 10 percent or more on 28 occasions between January 1926 and June 2015. Obviously, every decline of 20 percent or 30 percent or 40 percent began with a decline of 10 percent. As a result, some investors believe that avoiding large losses can be accomplished easily by eliminating equity exposure entirely once the 10 percent threshold has been breached.

Market timing is a seductive strategy. If we could sell stocks prior to a substantial decline and hold cash instead, our long-run returns could be exponentially higher. But successful market timing is a two-step process: determining when to sell stocks and when to buy them back. Avoiding short-term losses runs the risk of avoiding even larger long-term gains. Regardless of whether stock prices have advanced 10 percent or declined 10 percent from a previous level, they always reflect (1) the collective assessment of the future by millions of market participants and (2) the expectation that equities in both the U.S. and markets around the world have positive expected returns.

Exhibit 1 below shows that U.S. stocks have typically delivered above-average returns over one, three, and five years following consecutive negative return days resulting in a 10 percent or more decline. Results from non-U.S. markets are similar.

Contrary to the beliefs of some investors, dramatic changes in security prices are not a sign that the financial system is broken, but rather what we would expect to see if markets were working properly. The world is an uncertain place. The role of securities markets is to reflect new developments -- both positive and negative -- in security prices as quickly as possible. Investors who accept dramatic price fluctuations as a characteristic of liquid markets may have a distinct advantage over those who are easily frightened or confused by day-to-day events and are more likely to achieve long-run investing success.


 

Thatís Mulch Better: How to Grow a Fabulous Fall Garden

It’s been a long, hot summer, but fall is finally here, and it is the perfect time to plant that garden you’ve been considering (from the shelter of your air-conditioned house) all summer.

If you’re starting from scratch, you’ll need to determine the perfect place to plant your garden. You want it to be aesthetically pleasing, but you also want it to thrive. Many people make the mistake of shoving their gardens into a corner or along a fence line, but plants (like many other living things) need to breathe, and your garden doesn’t deserve to be in time-out. The perfect garden will get about half a day’s worth of sun and enjoy a refreshing breeze every now and then.

If your garden currently consists of a patch of dirt and a pair of Crocs, you’ll need to spruce up that summer soil. Water your garden for a few days before you plant, add some composite, and finish it off with a layer of mulch. The mulch will help your garden conserve moisture, regulate temperature, and improve the fertility of the soil -- not to mention, it just looks nice.

September is the perfect month to prepare and plant your fall garden. Stick with seasonal flowers like pansies, petunias, marigolds, and snapdragons. If you’re planning on creating an edible garden, you’re usually safe to plant anything that starts with a “C” -- cabbage, carrots, cauliflower, and cucumbers tend to thrive in fall gardens. Stay away from anything that thrives in intense heat or is too delicate for the cooler winter temperatures.

Your edible garden should be ready to harvest long before Jack Frost arrives, but make sure you collect any crops that can’t handle the chill before he gets here. Plants that are still bearing immature crops can be saved if you cover them up at night with a basket or blanket … no bedtime story required.



How the Body Celebrates the Change of Seasons

Believe it or not, the human body undergoes some odd changes as the seasons transition from summer to autumn. Sure, we see and feel changes in our environments (leaves turn to shades of red and yellow, temperatures drop, you trade t-shirts for jackets, etc.), but the body and brain react internally just as our environments do outwardly.

Everybody Talks: The nights will get longer, and surprisingly, so will your phone calls. A study of 1.3 million cell phone users in Portugal by researchers at the University of Newcastle found people spent more time talking on the phone in colder, wetter environments. If you find your contact list shrinks in the fall to close friends and family, don’t worry, that’s totally normal.

The Season of Love: Autumn, not summer or spring, is the optimal time of year people fall in love. While the temperatures chill out, our bodies counteract the potential for cabin fever by releasing extra boosts of dopamine, the brain’s natural “happy hormone.” The release of this chemical is what gives us romantic thoughts, butterflies in our tummies, and, of course, the desire to snuggle up close.

Hydration is Key: Despite the sweltering summer heat, in fall, we’re more likely to get dehydrated. You may not want to grab a water bottle over a soothing mug of hot chocolate, coffee, or tea on a 40-below day, but you should keep H2O in mind. If you’re not properly hydrated this season, you’ll be prone to ailments like dry, cracked lips, which is not good for the previous fun fact.

Jog Your Memory: Research published in the “Journal of Experimental Psychology” found that the mind is sharper and on higher alert in the colder seasons. Turns out, your memory recall skills are stronger on cloudy days than on sunny ones.

Just because you have to retreat indoors for a few months doesn’t mean great things won’t happen. So don’t fret, your brain chemistry is just as excited about pulling out your autumn jacket as you are!


Gremolata with Almonds

Serve this refreshing condiment over roasted carrots or roasted asparagus; it also works beautifully as a side dish to any entrée.

  • 1 cup raw almonds
  • 1 or 2 garlic cloves, halved
  • 2 bunches parsley, stemmed
  • Grated zest of 2 lemons
  • 1 teaspoon fresh lemon juice
  • ¼ teaspoon sea salt
  • Pinch of freshly ground black pepper

Soak the almonds in a small bowl of warm water until softened, about 30 minutes.

Drain the almonds and transfer to a food processor. Process until finely ground, about 1 minute. Add the garlic, parsley, lemon zest, lemon juice, salt, and black pepper and process until the mixture is crumbly and finely chopped, 30 seconds to 1 minute. Serve.

Store any leftover gremolata in an airtight container in the refrigerator for up to 5 days.

Recipe courtesy of Dr. Mark Hyman and the Blood Sugar Solution 10-Day Detox Diet.

James Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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