Vegetable frost
Shaun Scott No Comments

Trump May Dislodge “U.S. Exceptionalism Trade”

Savvy vegetable gardeners understand the first hard frost is a game changer for the home-grown food plot, introducing a whole new growing environment. Such a shift may be occurring in the global stock market dynamic that has been dominant in recent years. The “U.S. exceptionalism trade”, in which American stocks have soared while global stock prices have remained subdued, has reversed sharply since the swearing in of Donald J. Trump as 47’th President. What force is behind this changing investment theme, and will it continue or reverse?

The consensus opinion suggested President Trump’s business-friendly administration would give further advantage to U.S. stocks over foreign equities. While this thesis may prove true in the longer term, there is a more relevant factor playing out today. The “twin deficit”—the U.S. trade deficit and federal budget deficit—has played a major role in inflating U.S. asset prices. This cycle works by the U.S. borrowing money to purchase foreign goods, with trading partners then reinvesting that money into U.S. assets, fueling stock market growth. Historical trends show that when the twin deficit grows, U.S. stock prices rise, but when it contracts (as in 2022), markets suffer significant declines.¹

The Trump administration’s efforts to reduce both the U.S. trade deficit and federal budget deficit may lead to a decline in high U.S. asset prices in the short-term. While the President’s tariff policy is aimed at upending the trade deficit, a reduction in the federal budget deficit could come from Elon Musk and his “Department of Government Efficiency” (DOGE) implementing significant spending cuts.² The first half of President Trump’s second term may involve the market discovering which of the President’s arguments are negotiation tactics aimed at gaining concessions, and which are convictions he will indeed act on. The universally dismal record of historical tariffs has the financial world hoping Trump’s tariffs are short-lived, and that a full-blown trade war is averted. The issue of whether ‘The Administration’ allows DOGE savings to marginally reduce government deficits or uses it as an opportunity to “give” cash to American consumers (to prevent a reduction in U.S. consumption), is worthy of our attention due to its effect on earnings and stock prices.

While we applaud the reduction of government overspending and waste, we don’t want to be ignorant of the pain the corrective process requires. The savvy gardener is acquainted with the ‘first frost date’ in their respective zone and watches daily temperatures closely as it approaches to ensure a successful transition into the winter gardening season. As investors we want to do the same as we wait for these two issues to play out by:

  • Watching for a market rotation away from U.S. equities.

  • Keeping a short leash on high valuation securities.

  • Staying alert to policy changes that could affect trade and corporate profitability.

Think about it and may God bless your gardening and investing efforts!

Shaun

“Be wise as serpents, and innocent as doves” ~Mathew 10:16

1,2 Porter & Co., The Big Secret on Wall Street, “A One-Two Punch to U.S. Stocks”, February 27, 2025

Financial Estate
Shaun Scott No Comments

Wealth-Building & Multigenerational Asset Retention

While the endeavors are in ways dissimilar, successfully planning and surviving a big mountain expedition, and building and multi-generationally retaining a financial estate have much in common. The mountaineer must be conditioned (with strength, endurance, balance, and cold tolerance), equipped (with appropriate clothing and gear, and know how and when to use every item), and familiar with the chosen route (to remain within the skill set, maintain a margin for error, and stay on course). The mountaineer is afforded little tolerance for error, but so is the multigenerational wealth builder! Consider the skills and practices applied in their success:

  • Maintaining a net positive cash flow by working hard, increasing specialization in the chosen field, spending less than earnings, and investing the difference productively is foundational.

  • Effective Asset Management, among other things, requires:

    • Diversification into numerous non-correlated investments. Today 33% of SPY, a popular S&P 500 ETF, is invested in 10 stocks! That’s not diversification, as millions of American investors heavily exposed to this ETF may be about to discover.

    • An understanding we dwell in an inflationary culture, which forces more risk-taking than is natural, a concentration on assets with historical returns exceeding inflation coupled with avoidance of those which haven’t, and judicious risk mitigation strategies to sidestep the occasional meltdown unavoidable to fiscally reckless and heavily indebted societies.

    • Minimization of investment expenses, which directly dilute returns and compound the reduction indefinitely into the future.

  • Advanced Tax Planning, contrary to what most CPA’s suggest, involves:

    • Replacing the idea taxes should be minimized each year, with the more thoughtful idea lifetime taxes should be minimized.

    • Applying the means (Tax Loss Harvesting, Strategic Roth Conversions, QCD’s, CRT’s, etc.) to maximize taxes paid in low bracket years, minimize taxes paid in high bracket years, and prevent (not merely delay) every tax dollar possible.

  • Advanced Estate Planning goes beyond protecting the primary residence, naming trustees and executors, and properly designating beneficiaries, and:

    • Utilizes the lifetime gift tax exemption and GST exclusion.

    • Exploits the “step-up in basis” benefit for eligible assets.

    • Accounts for the possibility the Tax Cuts and Jobs Act of 2017 sunsets on December 31, 2025.

  • Logistical Retirement Income Planning arranges for a passive, sustainable retirement income stream that a) evaluates each possible source, b) meets expenses, c) satisfies Required Minimum Distributions, d) is prudent from an investment perspective, e) is compatible with the long-term tax strategy, and f) doesn’t interfere with the estate plan. What an interesting puzzle!

  • Asset Protection Strategies include the use of trusts, corporations, LLC’s, and liability insurance to isolate and minimize risk exposure with each wealth-building endeavor.

The complexity of both the large mountain expedition and the creation and retention of a financial estate requires a team effort. Both involve risks that must be identified and mitigated, and threaten deadly consequences for incompetence or neglect. Apply a thoughtful, diligent, holistic, and team approach to maximize your probability of success.

God bless your wealth-building and estate retention efforts! Shaun

“A good man leaves an inheritance to his children’s children” ~Proverbs 13:22

Tariffs
riwebgurusOFWM No Comments

Tariffs

Though an attempt is being made to present the concept in a favorable light, tariffs must be judged by their record. Free and open trade has Biblical roots and is mutually and highly beneficial in many respects, but ‘Protectionism’, a national trade policy seeking to protect domestic manufacturers by imposing tariffs on the imports of foreign producers, grows from the destructive root of subsidization. Voluntary subsidy wastes precious capital, feeds apathy, encourages substandard performance, and stifles creativity and effort. Tying one arm of a superior boxer behind his back is neither a noble, nor a fruitful solution for the inferior boxer, who might otherwise have learned from the beating. What is the record on tariffs and why, as investors, should we think about it?

The long record of tariffs proves that after subsidizing uncompetitive domestic manufacturers, tariffs increase prices, reduce employment, interfere with free-market supply-demand dynamics, and antagonize trading partners (Frederic Bastiat famously recognized that “when goods don’t cross borders, soldiers will”). The record on tariffs is so universally dismal that many on both sides of the aisle understand “A trade war has no winners”. Consider the facts:

  • The nation against which a tariff is applied doesn’t actually pay the tariff, consumers of imported products do in the form of higher prices. A Howard Marks study of President Obama’s 2011 tire tariffs revealed Americans were forced to spend $1.1 billion more on tires to preserve 1,200 domestic jobs, an average cost of $1 million per job, each of which paid $40,000. Marks cited similar results from a study of steel tariffs imposed by President Bush in 2002.¹ Tariffs represent a tax on Americans.

  • The Smoot-Hawley Tariff Act of 1930 triggered the most prominent trade war of the 20’th century. The retaliatory tariffs on U.S. goods caused a 61% plunge in exports by 1933, and a repeal of Smoot-Hawley in 1934. There is widespread agreement among historians and economists the Smoot-Hawley Act and its associated trade war amplified and prolonged the agonies of The Great Depression.²

  • Trade wars produce extensive uncertainty in the global business environment. What company wants to risk capital in a hostile nation that might over-tax its products or nationalize its assets?

President Trump’s tariffs introduce a significant new uncertainty to an expensive stock market and are capable of stoking inflation, ushering in a bear market recession, and/or inciting new military conflicts. It’s noteworthy the President wants lower interest rates, yet imposes inflationary tariffs which may force the Fed to increase rates. It’s also mentionable our Commander in Chief understands tax cuts are good because people and businesses generally make wiser financial decisions than the government, resulting in increased production, jobs, and economic growth, which in turn provides more revenue for the government, yet puzzling he fails to see that government taxes in the form of tariffs won’t produce opposite results.

At minimum we should expect increased volatility in 2025 as a result of the new dynamic.

Think about it, Shaun.

“So Hiram supplied the cedars and evergreens Solomon needed, and Solomon supplied Hiram annually with 20,000 cors of wheat and 20,000 baths of pure olive oil. So the Lord gave Solomon wisdom, and Hiram and Solomon were at peace and made a treaty.”   ~ 1 Kings 5:10-12

 

1 Howard Marks, “Political Reality Meets Economic Reality”, Memo to Oaktree Clients, January 2019

2 Foundation for Economic Education, “The catastrophic results of the Smoot-Hawley Tariff Act of 1929-1930”, December 10, 2016

bitcoin and ai
Shaun Scott No Comments

AI and Bitcoin

I learned three valuable lessons on a 2014 Rocky Mountain climb that have claimed the lives of many mountaineers, but God graciously preserved me. Flying from sea level to Denver, hitching a ride the following morning to 12,000 feet, and climbing the Continental Divide in winter taught me the importance of proper climatization. Establishing an investment position in any security at too high an entry point is equally reckless; price always matters. I also learned that daily pack walks on flat ground at sea level don’t constitute proper training for a winter expedition at 14,000 feet, but failing to perform proper due diligence on a security already priced to perfection before committing one’s precious capital is equally negligent. Thirdly, the section of the ‘The Divide’ we traversed offered no escape route, but maintaining a position in a speculative bubble without an exit plan is equally dangerous. Are Artificial Intelligence (AI) and Bitcoin sound investments? Is it wise to buy them now?

The AI sector and Bitcoin are being evaluated together because they are both enjoying the euphoric investor sentiment associated with past bubbles, like that of the internet in 1997 and housing in 2003. Consider how bond guru Howard Marks, of Oaktree Capital Management, characterizes a bubble: “a security, asset class, or market being driven by:

  • Highly irrational exuberance

  • Outright adoration for the investment, and a belief that it can’t miss

  • Widespread fear of missing out (FOMO)

  • Broad conviction that for this investment, there’s no price too high”¹

It’s difficult to confirm the presence of something as subjective as “irrational exuberance”, but with Bitcoin trading at 7 times its price of 27 months ago, and AI posterchild, Nvidia, increasing 11 times in the same period,² rational buying seems to have departed these markets some time ago. The fact that I am asked every day about AI and Bitcoin by people who do not ordinarily occupy their time thinking about financial investments suggests to me that adoration and FOMO are affecting the price of both, and since FOMO invigorates purchases aimed primarily at quenching fear, the 4’th destructive sentiment is also likely present.

It’s important to understand that both of these investments provide something of value to humanity and are actively changing the world we live in, and as a result, will likely be around for a long time. Bitcoin provides a store of value that is uncompromised and private, and AI is shortening the learning curve in virtually all industries. The question is not whether these are legitimate investments, but in what manner and capacity they should be purchased, and at what price. Investments in internet stocks in 2007 evaporated immeasurable wealth, but it went on to change the way people gather and store information and communicate globally. I suspect in another 18 years something similar might be said of AI and Bitcoin.

We might summarize this brief analysis by understanding that God put the Continental Divide there to be climbed, but it must be done thoughtfully, with adequate preparation, and the risks must be mitigated to the extent they can be. Most stocks that soared in the internet frenzy later went to zero and don’t exist anymore, and the same will likely happen in both AI and Crypto. I suggest the following before you venture into these expensive markets:

  • Do your due diligence and know what you are buying and why

  • Realize these are speculations and limit your investment to an amount you can afford to lose

  • Maintain an exit plan to limit your potential loss

Think about it, Shaun.

“When something is on the pedestal of popularity, the risk of a decline is high” ~Howard Marks

“Give a portion to seven, or even eight, for you don’t know what disaster may happen on earth.” ~Ecclesiastes 11:2

 

1 Oaktree Capital Management, Howard Marks’ Memo, “On Bubble Watch”, January, 2025 2 Yahoo Finance, 5 Year Price Chart for BTC and NVDA, January 31, 2025.

The opinions voiced in this material are general and are not intended to provide specific recommendations.

Mt. Shasta
Shaun Scott No Comments

Prospects for the Economy and Financial Markets in 2025

The Mt. Shasta guide team my climbing buddy and I hired to get certified in Crevasse Rescue in 2011 were the strongest young climbers we’ve ever seen, but over the five-day expedition three separate misjudgments of both terrain and technical strategy unnecessarily placed us in immediate life-threatening danger, harrowing ordeals still scary to think about today. The decisions were so bad that with only modest mountaineering experience we were able to identify each miscalculation, only to be overruled by the authority of the head guide. There is undoubtedly widespread confusion today over the 2025 U.S. economic and financial outlook due to recent ‘Fed’ misjudgments, in particular with trends in inflation, earnings, and interest rates. What is the true condition set for the economy and stock market, which direction does each pursue, and what is the potential range of outcomes?

‘The Fed’ has been promoting a narrative that lower rates will bring the economy to a soft landing in controlled inflation, but the economy isn’t slowing, it doesn’t need lower rates, and inflation isn’t contained. S&P 500 businesses have seen 8% average earnings growth in the last decade, only 7% annually long-term, and yet the forecast for 2025 is 9.5%.¹ Fidelity sees 14% earnings growth ahead and thinks the estimate is too low!² Tuesday’s employment report shattered estimates, revealing 256,000 new jobs were created in December and dropping unemployment to 4.1%.³ Let’s understand these simple facts about the economy today:

  • There is no indication of an oncoming recession anywhere on the horizon as far as the eye can see, though another increase in bankruptcies is possible in this new higher rate era.
  • Interest rates are probably net neutral at best in this economy (meaning, about right or too low).
  • Absent a recession, the probability of a significant bear market is low, and risk of a systemic crisis is even lower.
  • A strong economy is constructive for business investment.

The stock market is far less correlated to the true condition of the economy than most investors realize. The market looks forward to future earnings, while a recession is identified only in hindsight; also, economic reporters are bankers and politicians who never admit to a recession until it’s over. Let’s think about relevant market factors and the two most probable outcomes for a frothy market with a strong economy underneath it:

  • 22 times earnings places the S&P 500 into the top decile of observations,⁴ making it the top concern for stocks in 2025. By my count the S&P 500 could drop 23% just to get to its average long-term multiple, all other things being equal, and the market seldom lingers amongst its averages.
  • Higher valuations always lead to lower forward returns, and vice versa. A study of people who paid today’s rare multiple for the S&P 500 over a 27-year period universally earned ten-year average returns between -2% and 2%.⁵
  • A new administration with new policies, especially when tariffs are involved, will probably add to the increased volatility generally associated with an expensive market.
  • The two most probable outcomes I see, in this order, are a) a volatile market moves sideways or even down in 2025, allowing corporate earnings to catch up to prices and lowering multiples while avoiding a bear market and setting the stage for more sustainable growth, or b) a blow-off top, in what would be a third consecutive year of huge gains, but ending in a significant and protracted bear market bust that would likely take the economy with it.

Focus on quality and look for value and income. Diversify, but don’t risk the cash you may need for expenses or emergencies in the next five years. Ride the bull for its duration but have your “risk off” plan in place and honor it.

Think about it, Shaun.

“It’s not what you buy, it’s what you pay that counts. Good investing doesn’t come from buying good things, but from buying things well. There’s no asset so good that it can’t become overpriced, and thus dangerous, and few assets so bad that they can’t get cheap enough to be a bargain.” ~Howard Marks

“Be shrewd as a serpent, yet innocent as a dove” ~Matthew 10:16

1 Google, “Average S&P 500 Earnings 2024”, December 17, 2024
2 FPA (Financial Planning Association) Live Lunch Presentation, Iron Works, Warwick, RI, January 8, 2025, Fidelity Investments 2025 Outlook
3 MarketWatch, “Jobs report shows big 256,000 increase in December. Unemployment drops to 4.1%”, January 11, 2025
4,5 Oaktree Capital Management, Howard Marks’ Memo, “On Bubble Watch”, January, 2025

The opinions voiced in this material are general and are not intended to provide specific recommendations.

Shaun Scott No Comments

Advanced Financial Concepts Embraced by Inflation-Resistant Wealth Builders

Hiring a guide service and Sherpa and successfully summiting Mt. Everest is a respectable feat, but precious few who do so will ever step foot on Annapurna, a mountain in the Himalaya known as the most dangerous and technically difficult to climb on earth. While conditioning and perseverance may sustain a climber up and down the former, the latter also requires superior climbing ability, advanced technical gear and the skill set to use it effectively in the most treacherous environment imaginable, where only the most accomplished mountaineers have ever tread, and where a third of them lie frozen in the ice today. Building and retaining wealth in today’s heavily indebted, centrally managed, inflationary culture far more resembles the level of difficulty found on Annapurna, and requires an understanding of financial concepts that go beyond these basic tenets of wealth-building:

  • Maximize income with hard work and career specialization.
  • Minimize spending with strict budgeting and prudent debt management.
  • Establish the financial foundation of emergency savings, a specific plan to eradicate non-productive debt, and the right amount of the right type of life insurance.
  • Consistently and wisely invest expendable income.

While these four simple principles are sufficient to lead even the most conservative investors to financial success in a stable, sustainable society, continuously excessive government overspending and the destructive policies that always accompany it necessitate an understanding and application of more refined financial concepts:

  • The biggest risk today isn’t loss of principle, it’s loss of purchasing power. Assuming a measure of increased investment risk comes with the ownership of assets that have historically appreciated in real terms within inflationary cultures, namely stock in high quality businesses, high quality real estate, and other real assets. Much of the perceived wealth-building in America today is illusionary; it is nominal, not real (net of actual inflation).
  • Concentration on income-producing investments, as opposed to non-income-producing speculations, reduces investment risk, reduces bear market volatility, and results in the compounding of returns over time. Wealth-builders confidently purchase shares of capital-efficient, dividend-paying, industry-dominating businesses when they find them at a reasonable price, and they generally never sell them.
  • The understanding that when the globe loses confidence in the currency of a nation actively monetizing its debt, three things necessarily occur: 1) further money-printing results in full and immediate domestic inflationary consequences, 2) currency units formerly exported return home, and 3) tax rates escalate meaningfully. ‘Annapurna-like’ wealth builders in America today are fully engaged in advanced tax and estate planning strategies aimed at maximizing taxes paid in lower brackets, minimizing taxes paid in higher brackets, and reducing exposure to future tax abuse. The goal is to achieve the lowest average lifetime tax, not necessarily the lowest tax each year.
  • Remembering the most important aspect of investing is avoidance of a catastrophic loss, coupled with the knowledge that inflationary policies produce infrequent but pronounced market crashes, engages wealth-builders in asset protection strategies like trust and LLC ownership, separating business and personal interests, increasing insurance coverage on catastrophic risks,¹ and stop-losses orders.

In closing, remember the goal is stewardship, not accumulation. Money is to be earned, saved, invested, enjoyed, given away, and passed from generation to generation. It is something that He who owns everything has temporarily entrusted to us, and we should say thank you with faithful stewardship. Think about it and God bless your 2025, Shaun.

“God loves a cheerful giver” ~2Corinthians 9:7

“A wise man leaves an inheritance to his children’s children” ~Proverbs 13:22

“Without counsel plans fail, but with many advisers they succeed” ~Proverbs 15:22

1 Smart Asset, “5 High-Net-Worth Principles to Manage Your Wealth”, December 28, 2024

The opinions voiced in this material are general and are not intended to provide specific recommendations. Dividends can be terminated at any time by a company and do not protect against loss. 

Investment Management
Shaun Scott No Comments

Inflation-Driven Fed Re-Posturing Alters 2025 Investment Narrative

I recall running into a man of 50 and his 20-year-old son on the summit cone of Mt. Washington in June of 2009, the Father exhausted and slightly hypothermic. The pair were dressed in cotton and lost, and with temps at 48, a steady side wind blowing at 15-mph, and light rain, it was clear any number of slightly deteriorating weather conditions might quickly take the father’s life. In October 2022, stocks were oversold, but today stocks are historically expensive, which means any number of slightly deteriorating market conditions might trigger a painful reduction in stock multiples, including this week’s repudiation of the ‘Fed narrative’ of contained inflation, declining interest rates, and a soft economic landing. What are the market’s true conditions, and how should they affect capital allocations as we approach the new year?

The market concerns itself primarily with corporate earnings, interest rates, and inflation, and the many dynamics associated with these three primary issues. While ‘the Fed’ has been touting the aforementioned narrative and cutting rates, the economy has shown no need for cheaper credit, earnings have remained strong, and inflation has been rising for three months. ‘The Fed’ has been cutting rates absent an earnings recession as inflation rises; that’s like a climber eating 75% of his food for a week-long expedition on Day 1! The bond market first rebuked Powell & Co. with surging l/t bond yields, and this week Powell confessed inflation isn’t really contained and further rate reductions are questionable. We should also bear to mind the lag in the effects of each rate reduction, and, therefore, the possibility ‘the Fed’ has stoked already rising inflation in ways yet imperceivable. Soft energy and real estate prices may offset the pain of Powell’s recent misbehavior, but as you can see, the weather conditions for this climb are far more complicated than Mr. Powell has been indicating.

What are the Pro’s and Con’s of the condition set of a resilient economy, moderately rising inflation, and neutral interest rates? On the negative side stocks will likely find equilibrium at a lower multiple as the market descends from a rosier narrative and digests the possibility inflation may force ‘the Fed’ to raise rates in 2025. Inflation acts as a tax, so there’s a risk it will hamper ‘all-important’ consumer spending. The positives of an ongoing bull market and a resilient and stable economy with low unemployment, especially with rates close to what the market itself would set, is impressive and for now outweighs the negatives. False narratives removed, I believe once stocks find the new, lower multiple they now seek, and providing ‘the Fed’ can avoid becoming another problem right away, it’ll be all about the U.S. economy in 2025; specifically, whether it can elude an earnings recession without causing inflation to accelerate.

Eradicate politics, geo-politics, and macro-economics from your investment decision-making process, and use tools to prevent your emotions from finding another way in. Make adjustments to your investment portfolio, not sweeping changes; lean, don’t jump. Raise some cash by taking profits from highly appreciated securities trading at extreme multiples. Concentrate on ownership of high-quality businesses, but limit equity exposure to your personal risk tolerance level. Concentrate on short duration bonds, and realize cash is still attractive at 4.3% interest. Own some inflation and chaos hedges via alternatives but stay away from the speculative frenzy!

The two thoughts that come to mind in this market environment are “stay nimble”, and “exercise prudence”. May God bless the Christmas in our hearts this year.

Shaun.

“For God so loved the world, that he gave his only Son, that whoever believes in him should not perish but have eternal life.” ~John 3:16

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.

Shaun Scott No Comments

Portfolio Rebalancing

Solo mountaineering is among the most dangerous sports on earth, and without a minimum of three climbers there is no one to stay with the injured as one retreats for help, substantially increasing the probability of a fatality. Providing each mountaineer is experienced, without injury and fit, team climbing is safer, and, therefore, more successful than solo climbing. This principle also applies to investing, though a diversified portfolio of quality holdings can stray substantially from the initial, desired allocation as the performance of each security varies, increasing risk exposure, much like a climbing team that fails to function as a group. Systematic rebalancing periodically restores the desired portfolio allocation by reducing outperforming and increasing underperforming securities. Consider the numerous benefits and few disclaimers of this popular investing strategy:

  • Periodic rebalancing realigns the asset mix of a portfolio to an investor’s objective, which includes risk tolerance, income need, and time horizon, much the way a climber consistently refers to a map to stay on course.
  • Portfolio rebalancing assists in risk management at both ends of the spectrum: by correcting overexposure to riskier securities in a bull market and safer securities in a bear market, thereby preventing the portfolio from deviating from the appropriate risk level in either direction.
  • Rebalancing doesn’t guarantee loss avoidance or enhanced performance, but it can increase risk-adjusted returns by forcing investors to systematically buy low and sell high.
  • An investor has many tested strategies from which to choose, none of which involve acting on emotions. Regular rebalancing removes an investor’s destructive emotions from the money management process.  
  • Systematic rebalancing has proven effective in changing market conditions by directing capital to lower valuation securities.¹ 

While the benefits are significant, portfolio rebalancing does have the following potential disadvantages:

  • Rebalancing trades can increase portfolio costs. Expenses directly reduce returns, and worse, the reduction compounds indefinitely into the future. If rebalancing, try to use a firm with little or no trading fees.
  • Periodic rebalancing is effective to the extent productive securities are held. Security selection is as critical to the success of this investing strategy as the selection of climbers for a Mount Everest expedition.
  • Rebalancing in a non-retirement account can trigger substantial, unexpected taxable gains. Integrate the rebalancing program with a tax-loss harvesting discipline to avoid this unpleasantness. 
  • Excessive rebalancing can be counterproductive. Choose either a reasonable interval of time or the breach of a particular allocation threshold as the basis for your periodic rebalancing, and stick to it.  

Think about it, and may God bless your investing efforts! Shaun.

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2

 

1 Smart Asset, “5 Benefits of Regularly Rebalancing Your Investment Portfolio”, November 5, 2024

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.

Shaun Scott No Comments

Identify and Overcome These Destructive Investment Biases

It’s true the stock market is an entity especially equipped to inflict the maximum amount of punishment on the largest number of investors possible, but it’s also true the investors it seeks to discipline inherently carry destructive behavioral biases which especially condition them for market abuse. There are reasons why the average individual investor consistently earns a long-term return equal to a tiny fraction of the market itself, and why active professional money managers can seldom match the return of the broad market, the biggest of which is these destructive biases. In our quest to learn how to consistently make wise investment decisions, let’s identify the worst of these prejudices and replace them with knowledge and an investment process that gives no voice to emotions.

  • Recency Bias occurs when an investor considers recent market returns when making investment decisions. Absent a consideration of real market influences, this prejudice will often lead to buying at market peaks and selling at market bottoms. Solutions include regular account rebalancing and closely following an investment policy statement.
  • Confirmation Bias seeks support for an erroneous view which masquerades as investment research, and often devolves into an obstinate rejection of facts. The simple acknowledgement that truth will disprove every natural opinion we have will invigorate the due diligence which produces an informed decision.
  • Ownership Bias believes an investment holding is more valuable because we own it. Illogical and full of hubris, this partiality often leads investors to double down on losing positions, which can crush portfolio returns. An effective solution to this malady is a commitment to run with winners and dump losers with ruthless expediency.
  • Loss Aversion Bias results from the typical predisposition investors have to feel the pain of loss more profoundly than the pleasure of an equivalent gain.¹ This ailment leads to a refusal to unload losing positions and/or an assumption of more risk to make up for the loss, a solution for which is the establishment of an exit plan at the time of purchase for all non-forever holdings.
  • Arrival of Humanity Bias appears at major market peaks, convincing vulnerable investors via mainstream news sources that stocks will never significantly decline again because “it’s different this time”.² Understanding “There’s nothing new under the sun” (Ecc. 1:9), coupled with a recognition of the natural market peak-trough cycle, will protect you from a false idea that has claimed the financial lives of many investors.               

Two final thoughts on neutralizing the biases which will otherwise neutralize your investment capital are a) realize you are not exempt from these biases; in fact, they especially apply to you, and b) to benefit you, truth and facts must be acted on; establish and closely follow an investment policy statement which will give emotions and biases no voice in your ongoing pursuit of consistently making wise investment decisions. 

Think about it, God bless your efforts, and Happy Thanksgiving! Shaun.

“Every good gift and every perfect gift is from above, and comes down from the Father of lights, with whom there is no variableness, neither shadow of turning.” ~James 1:17-18

1 PIMCO, “Behavioral Science Reference Guide”

2 “The Little Book of Behavioral Investing”, James Montier

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.