Looking at the title of this commentary, I have to make some comments on the 20 year anniversary of that terrible day in history. On that day in 2001, I was in San Francisco as a “way station” on my way to Hawaii for a vacation. Needless to say, the Hawaiian portion of my vacation was cancelled. I wasn’t able to return home until the following Sunday. The world was with us on that day and afterward, it is a tragedy that unity was squandered. And I am sure that you have probably had your fill of documentaries on the subject, but I recommend that you watch “Rise and Fall : The World Trade Center” on the History Channel. It has some interesting facts on how the towers were built as well as their tragic fall. Fortunately, I didn’t lose any friends or family on 9/11, although several of my friends worked in NYC and they suffered PTSD from the trauma of that day. And several years prior to 2001, I commuted to Wall Street thru the WTC at about the same time that the planes hit and thought – wow I could have been there – fate works in strange ways, doesn’t it? Finally, did you know that the pilots assigned to bring down United 93 were on a suicide mission? There wasn’t time to arm the plane! They were going to ram the aircraft. Again, fate intervened.
Before making making my commentary on the market and my funds, I also need to comment on a recent Q&A in Barron’s with Laurence Kotlikoff, a noted economist at Boston University. He is recognized for his work on Social Security planning – I think he should stick with that. Why? He advocates paying off a 2-3% mortgage with funds that could be earning an average of 11-12% in the S&P 500. And as much as 39.6% of that 2-3% could be subsidized by a tax deduction. And he also suggests destroying future IRA earnings by paying off a mortgage – with no consideration of the tax consequences. If mortgage rates were a lot higher his advice might make sense, but with today’s low rates, it is irrational to me to not take advantage of leverage. Even Jim Cramer, with a net worth of about 100 million dollars, has a mortgage. So take Kotlikoff’s advice on Social Security, but take financial advice from other experts. Being debt free with no mortgage is nice, but it is even nicer to be get rich using other people’s money.
Now to my commentary on the markets. I think that we may be due for a 5% correction in the market by October. Which leads me to my contention that a 90% S&P 500/ 10% Money Market allocation with the additional action of moving 100% of the Money Market to the S&P 500 if the S&P 500 dropped 5% or more. The money market allocation would be replenished by regular contributions to be ready for the next dip. I asked Mark Bates to “back test” this theory over time and it works quite well. From the period starting with the earliest SPY date in Feb 1993, my model earned a risk adjusted return of 12.33% vs. 8.5% for the SPY. Some of you may be accusing me of trying “market timing” – no, it is not, it is only taking advantage of a situation. There are (and will be) times where the market dropped 5% and then dropped again on the next day – when there would be no funds available in the account. And I strongly advocate the virtues on dollar cost averaging into the S&P 500, my theory only supplements and enhances that practice.
On the Growth Fund, I am pleased with its performance. Note that my confidence in some of the more obscure names like Floor & Décor Holdings (FND), EPAM systems (EPAM), and Monolithic Power Systems, Inc. (MPWR) as well as more well known names like Lululemon Athletica Inc. (LULU) and Alphabet (GOOGL) have proven to be correct. Of course there have been losers like OLLI, BABA, and VIPS which are real drags on the performance of the funds. As I said before, diversification lessens the impact of these laggards. And don’t forget that I advocate taking some earnings if you can when a stock is up by 30% or more in a short period – that advice would certainly have proven effective on VIPS.
On the Income Fund, again, I am pleased with its performance and hope that you own at least some of its components. While growth is important, income from dividends is a very important component of any investment plan, especially in today’s low interest rate environment. Having money in cash is a losing proposition, as cash and cash equivalents pay next to nothing so you actually lose money when accounting for inflation. As for the individual components of the fund, as I mentioned last time, I would recommend holding all of the stocks in the fund except for Western Union (WU). I am less than sanguine Western Union’s prospects, so I would not add to this position if I were you.
Well, that is about all for now. I hope that you continue to enjoy my posts, and I welcome and encourage your comments.
Likewise, was traveling that day; was in Richmond, scheduled to fly home that evening. Meetings were going to wrap up early, called the office to try to get an earlier flight….was told “you’re not flying anywhere, they’re flying airplanes into buildings…..don’t give up your rental car!”
Drove back to Ky that day with a colleague, returned the rental to the airport – when I pulled into the airport, was stopped by National Guard soldiers. That 12 hour drive was punctuated by a hundred stops, as gas stations were already rationing gas to 3-5 gallons per purchase.
Dan’s mortgage vs investment narrative is well timed, a family member is assessing that very situation as we speak; my counsel has been to pay off debt, regardless (a la Dave Ramsey), but we will reconsider.
On 9/11 I was on my way by car from Providence RI to Boston to attend a vendor meeting on a piece of software. We just happened to have the radio on in the car to monitor traffic. I was the ranking employee and made the call to turn the car around halfway to Boston after the second plane hit the towers, and we also extended the rental (you could not get a rental car for days later). The next day I drove back with a co-worker 15 hours from Providence to Louisville. Electronic signs said the major arteries into NYC were closed. No planes in the sky. It was so strange.
Dan’s approach to buying the broad market and buying the dips however is not strange. As he noted, the returns beat the S&P 500. I wonder if we combined Dan’s 90/10 theory with the idea that we’ll only buy when price drops below the 200dma — whether that would increase return even more. Lots to consider here. But simple is best, and Dan’s approach is solid, back tested, and straightforward.