Long-Term Investors, Don’t Let Recessions Faze You

With activity in many industries sharply curtailed in an effort to reduce the chances of spreading the coronavirus, some economists say a recession is inevitable, if one hasn’t already begun.1 From a markets perspective, we have already experienced a drop in stocks: prices have likely incorporated the increased chance of recession. Investors may be tempted to abandon equities and hold cash because of fear of recession and its impact. But across the two years that follow a recession’s onset, equities generally have a history of positive performance.

Data covering the past century’s 15 US recessions show that investors tended to be rewarded for sticking with stocks. Exhibit 1 shows that in 11 of the 15 instances, or 73% of the time, returns on stocks were positive two years after a recession began. The annualized market return for the two years following a recession’s start averaged 7.8%.

Recessions understandably trigger worries over how markets might perform. But history can give those investors who wonder whether a coming recession may be time to move out of stocks the needed confidence to stick with an informed strategy and stay with their plan.

Exhibit 1. Downturns, Then Upturns
Growth of wealth for the Fama/French Total US Market Research Index

illustration, Exhibit 1. Downturns, Then Upturns Growth of wealth for the Fama/French Total US Market Research Index

Past performance, including hypothetical performance, is not a guarantee of future results. In USD. Performance includes reinvestment of dividends and capital gains. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

Growth of wealth shows the growth of a hypothetical investment of $10,000 in the securities in the Fama/French US Total Market Research Index over the 24 months starting the month after the relevant Recession Start Date.

Sample includes 15 recessions as identified by the National Bureau of Economic Research (NBER) from October 1926 to December 2007. NBER defines recessions as starting at the peak of a business cycle.


  • Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before.
  • Exclusions: American Depositary Receipts.
  • Sources: CRSP for value-weighted US market return.
  • Rebalancing: Monthly.
  • Dividends: Reinvested in the paying company until the portfolio is rebalanced .

1Nelson D. Schwartz, “Coronavirus Recession Looms, Its Course ‘Unrecognizable,’” New York Times, March 21, 2020; Peter Coy, “The U.S. May Already Be in a Recession,” Bloomberg Businessweek, March 6, 2020.

Why Stocks Act Good When News is Bad

Are you puzzled when the media broadcasts bleak economic or health reports from yesterday, only to be accompanied by upwardly surging stock market prices? You’re not alone. The last few months produced many examples of astonishing stock market performance and economic indicators putting the U.S. in recession. So what explains the disconnect?

Markets are forward-looking when pricing stocks or any other security. That means, today’s asset prices are highly efficient in aggregating future expectations of market participants collectively. Today’s news is already old for making investment decisions. Expectations of profit-seeking participants such as hedge fund traders have already anticipated likely future economic developments such as the timeliness of a recovery and how that may impact the future profitability for those companies that survive the crisis.

Profits from anticipated revenues for years in the future are key to estimating a stock’s price today. For example, if the market expects an economic environment to weaken company cash flows to make firms less profitable (say from new government policy due to virus resurgence), markets will react well in advance of a formal news announcement. Expectations from any new information is rapidly embedded in stock prices—often in seconds—as profit-seeking participants “vote” their profit expectations in real time.

Of course, an upward or downward direction of stock market prices depends on how well realized information compares to collective expectations of investors. If news of results are better than expected, even what could appear as “bad” news can be greeted positively by financial markets. For instance, if profitability has improved relative to what markets had priced into their expectations, stock prices may jump when what appears as “bad” news (such as a dividend reduction) is released if that reduction is not as much as expected.


The anticipatory behavior of markets can be illustrated using U.S. gross domestic product (GDP) growth as a proxy for current profitability and its relationship to equity premiums (stock market returns in excess of risk-free U.S. Treasury bills). Plots in Exhibit 1 show no discernable relation between U.S. equity premiums and GDP growth for the same year. Changes in GDP are obviously not strongly related to stock market returns in the same year.

This result does not imply financial markets are ignoring macroeconomic data. After all, GDP encompasses multiple economic measures that seriously impact corporate profits. However, while growing GDP imprecisely represents activities driving stock prices upward, more analysis shows how the popular media narrative of a direct relationship is incorrect.

When we plot GDP growth against the previous year’s equity premium (shown in the bottom panel of Exhibit 1) a noticeable relationship suddenly appears. The positive trend in the data upward to the right suggests market prices are responding to GDP changes. However, prices did so in advance of realized economic developments. This result — at odds with popular belief — is consistent with the best financial theory and research. Markets prices in publicly traded markets “efficiently” incorporate economic growth expectations long before those outcomes are realized and reported by the media.

Exhibit 1: Plot Development

US equity premium vs. GDP growth, 1930-2019

Graph of equity premium in same year as GDP growth Graph of equity premium in year before GDP growth

Annual GDP growth rates obtained from the US Bureau of Economic Analysis. GDP growth numbers are adjusted to 2012 USD terms to remove the effects of inflation. Annual US equity premium is return difference between the Fama/French Total US Market Research Index and One-Month US Treasury Bill. Equity premium data provided by Ken French, available at mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html. “One-Month Treasury Bills” is the IA SBBI US 30 Day T-Bill Total Return, provided by Ibbotson Associates via Morningstar Direct.

This brings us to new headlines that affect your planning: the financial fallout from multi-trillion-dollar government expenditures intended to ease the burden of government mandated shutdowns. Will those trillions being spent create a financial burden for the U.S. government and for its citizens as higher taxes in ways that adversely affect stock returns?

The results in Exhibit 2 may allay concerns regarding how those huge expenditures may impact equity market performance. When we sort countries each year on their debt-to-GDP for the prior year (top panel), average annual equity premiums have been slightly higher for high-debt countries than low-debt countries in markets globally. However, the return differences’ small t-statistics — a measure of the precision of a value’s estimate and thus its validity — suggest these averages may not be reliably different.1

But it could be that markets more focused on where professional investors expect the amount of that debt to end up, rather than on where it’s been. The top panel uses prior year debt-to-GDP data to sort countries into the high/low groups. In the bottom panel of Exhibit 2, we rank countries on debt-to-GDP at current year-end, assuming perfect foresight of end-of-year debt levels. Again, we see average equity premiums similar for high- and low-debt countries. Like the results for GDP growth, these results imply that markets have already priced in expectations for future government debt and business profitability risk.

Exhibit 2: Debt Defying

Average equity premiums for countries sorted on debt

Chart of Average equity premiums for countries sorted on debt

All returns in USD. Countries are sorted at the beginning of each year. High-Debt and Low-Debt refer to countries above and below the median debt, respectively. Debt is general government debt and central government debt. Source: The International Monetary Fund. Equity market returns represented by MSCI country indices. Dimensional Fund Advisor LP calculations from Bloomberg and MSCI data. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.


Macroeconomic variables and investment decisions are like frozen turkeys and deep fryers — extreme caution should be exercised when used in combination. These studies are consistent with the notion of markets as information processing machines. Vast sets of macroeconomic indicators and their expectations are processed into what we see as market prices. The ironic result is that stock markets in the form of indexes like the S&P 500 are themselves perhaps among the best leading macroeconomic indicators we have.

Since markets are such good predictors of economic conditions, their short-term movements are fiendishly unpredictable. For planning, we assume their movements are essentially random. It should not surprise us that survivorship of mutual funds and hedge funds focused solely on what is called “market timing” has been abysmally low. Fortunately, with modern financial science at the core of a wealth management strategy, you don’t need to out-guess the markets or economy for reliable life goal outcomes.

Over time, capital markets have consistently rewarded those with a long-term perspective who remained disciplined in the face of market surprises. No matter what you may read in the media, there are no miracle products to save you if you saved too little or spent too much. In my years as a CFP® professional, I’ve never seen one that paid off both very well and for very long. The new “structured products,” like so many varieties of hedge fund schemes that came before them, were devised to be sold, not owned.

But through an informed wealth management process that collaborates with a knowledgeable firm of CFP® professionals and other specialists, you can position yourself to make the most of what markets and integrated planning have to offer. And through the right strategy for achieving your life goals, you can have peace of mind even during a crisis.

1Researchers often cite a t-statistic value of 2.0 as the threshold for statistical reliability.


  • Macroeconomic data: Data used to measure the output of an economy, such as employment or production.
  • Gross domestic product: The total value of goods and services produced by, for example, a country over a set period of time.
  • Debt-to-GDP: The ratio of a country’s debt to its gross domestic product.
  • Fama/French Total US Market Research Index: The value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

Do Downturns Lead to Down Years?

Stock market slides over days or months may lead someone with investments to anticipate a down year for their portfolio results. Fear from a coronavirus-induced business downturn has resulted in the greatest and fastest fall of stock prices in American history.

Seeing disappointing prices and projecting poor results coming, many people decide to sell at least part of their stock positions and hold cash on the side. For example, in the worst month of the recent decline in March, money markets added nearly 17 percent to their asset base, when average monthly changes up and down are less than 5 percent.

There will always be times of good and bad financial markets, and good and bad investments within those markets. Assuming that you have a diversified, long-term strategy within your comfort level that allows for informed adjustments as appropriate, and that you collaborate with a knowledgeable professional, that does not mean you will worse off if you stay put. In fact, you very likely can be a lot better off if you’ve created a plan that’s right for you, based on your personal goals, priorities and attitudes toward risk. A realistic snapshot is needed.

Before making changes, you should consider your current situation and whether your needs or goals have changed. The biggest risks are market volatility, recessions and the unknown. Most people prefer risks that are constrained to acceptable levels. They want to protect their assets, generate growth and build consistent returns for financial security and a comfortable retirement to maintain their lifestyle for as long as they live. If you wisely diversified in stocks and bonds, the recent great fall was greatly mitigated for you.


Don’t be too quick to assume, with the deluge of media pessimism, that outcomes for 2020 and beyond — at least for investors — may not still be favorable. Our exhibit of a broad U.S. market index shows positive returns in 15 of the past 20 calendar years, despite notable dips within the days during a calendar year. Standard frameworks ignore daily market volatility.

U.S. Market Intra-Year Declines vs. Calendar Year Returns
January 1, 2000-December 31, 2019
Illustration of chart:  U.S. Market Intra-Year Declines vs.Calendar Year Returns January 1, 2000-December 31, 2019

Source: U.S. market is the Russell 3000 Index. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Here are a few observations we can make from this brief record of recent history:

  • Intra-year declines for the index ranged from 3% to 49%.
  • Calendar year returns improved during each of those intra-year slides. The steepest declines show the most notable recoveries in either the same or following year.
  • In 15 of the 20 years, stocks ended up with gains for the year.
  • Even amid the financial crisis in 2009 where a disaster seemed possible almost day-by-day, a 27% plunge gave way to a 28% gain by the end of the year.

A globally diversified portfolio is positioned in many different markets and impacted by different local events. We know from modern financial science there are multiple dimensions of return such as size, value and profitability operating within the financial markets of each country, of which the U.S. is simply the largest economy. Certainly, financial markets will have different sectors such as technology or energy that perform differently over a normal business cycle.

Markets are especially volatile when significant new information is discovered. Markets are like vast information processing machines that produce prices. Recent news regarding a previously unknown virus evoked memories of the dreaded Spanish flu. That implied a potentially huge negative impact on business profits and economic outcomes. That fear caused market prices to become highly volatile and a modest panic ensued as big firms sold off automatically to cover highly debt-leveraged positions in a progressively cascading effect. As the impact of the perceived risk was better understood and uncertainty reduced, volatility subsided. Prices in markets worldwide have reset themselves at another, lower level. While we are cautiously optimistic, the pricing process will take time to fully work out.


You most likely would rather plan forward than look backward. You don’t care to know what went wrong in the past; you want to make the right decisions going forward. That means a balanced diversified investment strategy that aims to anticipate volatility without the need for futile predictions. After all, how many gurus predicted weeks ago a virus from China that would precipitate a chain of events that would virtually shut down the American economy?

Volatility is normal for investing. A long-term focus helps informed investors holding diversified strategies constructed from modern financial science and who collaborate with knowledgeable fiduciary professionals, keep a clear perspective for planning their future.

If you are still reading this, you’ve already endured a lot of risk in recent months. If you’ve wisely planned and smartly added to your stock positions, then stick around for the return.

Controlling What Matters Most in a Crisis

Markets globally are recovering more rapidly than you might expect after reading about today’s new Coronavirus deaths or how unemployment figures in the U.S are hitting record highs.

Over the past two months, we’ve all experienced a roller-coaster of emotions—especially fear. First, the media reminds us daily of a contagious virus that could infect and kill you or your family with a new death tally. Then state government mandates keep millions at home and keeps millions of citizens from working at their jobs.

Many Americans worry how to pay rent and bills. A little CARES money from the IRS won’t help most of them. And for those near or at retirement, planning a comfortable lifestyle from portfolios that gradually grew over the past decade, now worry about what will happen. Moreover there are grieving families of those who got sick and died.


Financial marketplaces like the New York Stock Exchange can be leading indicators of U.S. economic health. Share prices on exchanges around the world are rising again this week. That is not an indicator of imminent doom. Continued recovery of markets from their lows implies that the savviest investors — including institutional traders whose algorithms dominate trading — believe that early virus risks were overstated, and that an apocalyptic outcome will not occur. That does not mean that there are no other important investing risks around.

Market prices of publicly traded stocks and other securities aggregate all available information — not just the news sensationalized by the media. Markets prices incorporate a collective “best estimate” of how soon states will reopen for business and Americans resume their normal lives. Opinions about how much “stimulus” of government spending will, in fact, stimulate American business are incorporated in prices. That is another big risk markets have uncertainty pricing.

For us at Professional Financial, it is a fundamental principle of investing that modern capital markets continually process new information in the form of prices. Information processing through prices occurs almost instantly as markets decline and when they rise. Sharp price declines distress investors, but even large unexpected changes are evidence that markets are functioning properly during a perceived crisis.

Market declines occur when investors, collectively, are forced to reassess their future expectations for earnings that companies, represented by those shares, may generate. What made the Coronavirus so terrifying to investors was the media’s sensationalized death forecasts that ignored the reasonableness of the assumptions underlying those models. Immediately after the gargantuan CARES Act was passed, updated models gave radically new forecasts with outcomes only 5% of earlier worst-case scenarios.


Our investing strategy is based on the principle that markets price securities to deliver positive expected returns. Markets, as vast information procession “machines,” evaluate a constant flow of information as each participant judges individually the impact of new information on future outcomes of various businesses. Prices may adjust wildly during times of heightened uncertainty — such as how fast and far a deadly contagious virus will spread or be allowed to spread. When perceived risks increase due to newly discovered information, that news is quickly incorporated into prices as investors then pay less for shares.

As market participants collectively gain certainty about the impact on future company profits in general — say, observing how governments are attempting to ameliorate the human and business costs of shutting the economy down — perceptions about risk begin to ebb. Prices of stocks one by one stop declining and then begin to reverse, in fits and starts, collectively precipitating a rally like we are seeing. Even though the media today displays infected people dying, market participants have a different picture of tomorrow.


Disentangling emotions from investment management is essential. Bombardment daily and hourly from negative media news plays havoc with our emotion. It clouds rational thinking. There is no reliable way known to identify a market bottom, much less a peak. Emotion commotion should not infect your investing decisions. If you over-react and get out, how do you ever decide when it’s “safe enough” to get back in?

We can’t be sure if market rises of the last few weeks won’t be followed by a short decline. Eventually, in the years ahead, there will be another big market decline triggered by events we cannot predict. But our expectation is that clients positioned in dimensionally-targeted strategies will be well-compensated with higher positive expected returns that help them better realize key retirement and legacy goals. Those who fearfully sell shares in panic when negative news overwhelms their emotions will be rewarded only with regret.


What so many see as a crisis, we see as a tremendous opportunity for our clients as well as ourselves.

Our planning philosophy expects bad things to happen unexpectedly. Markets are volatile. Since, by definition, a panic is “unexpected,” we cannot predict when it will happen or how much volatility there will be. But in recent years large growth stocks around the world, but especially in the U.S., have reached historically ridiculous valuations. In fact, at year-end expected returns of U.S. growth stocks had been trading down to those of investment grade bonds.

Value and small stocks around the world have been hit badly — but that’s good news for the informed investor. Expected returns are not just higher — they are much higher due to panic liquidity selling on the long, painful and ugly decline. In phases we bought into discounted positions through Dimensional Fund Advisors all the way down. Our investment management process systematically buys into falling prices to rebalance, not knowing when the bottom would occur.

Repeat the investor’s mantra: The company’s cost of capital is my return. Repeat again. Breathe and relax.

When prices go down, that means the cost of capital is going up. That means, your expected return for planning purposes is higher. When highly leveraged hedge funds are desperate for cash to pay their loans, your purchase helps them — for a price. Crisis is a rewarding opportunity for liquidity providers (you!) with time to wait it out.

Based on decades of leading theory and research, we prepared with a crisis in mind when we designed your strategies and had a process arranged for such an event. I dream of and dread these times. But our planning appears to have worked well.

What now matters most for long-term success in investment planning, if you feel the need to take action, is to stay focused on those things you can control. The most important thing you can do today, is to control your actions.

Don’t have a crisis of confidence. You’ve endured a lot of risk these last two months; I urge you to stick around and wait for your return.


Better yet, forget about your portfolio — you pay us to worry. Once a quarter is enough for most of you.

Enjoy being with those you love. Even before stay-in-place restrictions lift, turn off your news media access. Think about what most matters to you and what most gives you purpose. Prioritize your life and start living.

At the very least, certainly after a long winter, get out of the house and enjoy spring. You only live once.

We are here for you, 24/7 for a conversation. Call or email us with your questions and concerns.

Warm regards, and God bless – Paul

Epidemics, Market Declines and Planning Strategy

Around the world a spreading coronavirus is raising distressing concerns. Will it be contained or become a pandemic? Uncertainty has been experienced globally, and it is unsettling both on a human level and for investors concerned how a spreading epidemic may impact their portfolios after recently seeing the biggest market declines since the panic of 2008.

It is a fundamental principle from modern financial science that competitive capital markets are designed to handle financial uncertainty, as they process information in the form of prices through trading almost instantaneously. Information is processed when markets decline and as they rise. Excessive attention paid to media headlines during plunging market declines is distressing, of course, but such price volatility simply demonstrates the efficiency of financial markets functioning as unbiased aggregators of information repricing expected returns.

Exhibit 1: What Affects a Stock’s Current Price?

graphic, What Affects a Stock's Current Price?

Using all available information, a stock’s current price — or a group of American or Chinese stocks comprising their home markets — reflects the aggregate financial expectations of participants about risk and return pertaining to that security from the past, present and even anticipated future information. Market declines occur when informed participants must reassess their future expectation due to negative “news” as it is almost instantly incorporated into that stock’s price or the price of a group of securities.

The spreading of an epidemic outbreak worries governments, companies, and individuals about the potential impact on their domestic and the global economy. Apple announced earlier this month that it expected revenue to take a hit from problems making and selling products in China.1 Australia’s prime minister has said the virus will likely become a global pandemic,2 and other officials there warned of a serious blow to the country’s economy.3 Airlines are preparing for the toll it will take on travel.4 These are only a few examples of how the impact of the coronavirus is being assessed.

The market quickly responds not only to new information becoming known, but in pricing potential unknowns, too. As risk increases uncertainty, so investors demand greater returns for bearing risk. Those demands push prices lower and expected returns higher. Our entire management strategy of multifactor investing depends on the fundamental economic principle that prices adjust to deliver positive expected returns for investors who hold risky assets.

We can’t tell you when the decline will reverse. Our expectation is, however, that disciplined clients who bear risk will be compensated with positive expected returns. That’s been the lesson of health-related crises in the past, such as the Ebola and swine-flu outbreaks, that cause temporary market disruptions, and those epidemics did not impede recovery from the Tech Bust of the early 2000s or the global financial crisis of 2008-2009.

Additionally, studies of market history have shown no reliable way to identify a peak or bottom. This argues against investors taking actions outside of investment policy guidelines based on fear of loss or greed for gain, even as traumatic events transpire. Looking at the U.S. market’s resiliency through multiple past epidemics gives perspective on the advantage of a disciplined investment approach for planning.

Exhibit 2: Epidemics and U. S. Stock Market Performance Since 1980

chart, S&P 500 Index Price Performance chart, Epidemcis and S&P Price Performance

Source: Bloomberg, as of2/24/20. Month end numbers were used for the 6- and 12-month % change. *12-month data is not available for the June 2019 measles. Past performance is not a guarantee or an assurance of future results. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses, or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only and not indicative of any actual investment. These returns were the result of certain market factors and events which may not be repeated in the future.


The portfolios of Dimensional Fund Advisors play an important role in helping clients stick with an informed strategy through changing economic and political conditions. We educate clients to be aware of possible extreme outcomes, positive and negative, when deciding on an investment policy. We review your policy regularly to make sure it still fits your situation. Our planning assumes inevitable market downturns. Amid the anxiety of such times, decades of financial science and academic-level research guide our process and our judgement.

Focus on the long-term: Working with Professional Financial, your strategy is exceptionally well-diversified. Your investment portfolio is coordinated with your wage income and your current or future Social Security, pensions, annuities and reverse mortgages. Make changes only as lifestyle needs and family objectives change. Don’t let media noise and fear run your life. Stay in good health and spend time with family and friends doing things that truly matter. That’s why we are here — to worry for you.


1Apple, February 17 press release. https://www.apple.com/newsroom/2020/02/investor-update-on-quarterly-guidance/

2Ben Doherty and Katharine Murphy, “Australia Declares Coronavirus Will Become a Pandemic as It Extends China Travel Ban,” The Guardian, February 27, 2020. https://www.theguardian.com/world/2020/feb/27/australia-declares-coronavirus-will-become-a-pandemic-as-it-extends-china-travel-ban

3Ben Butler, “Coronavirus Threatens Australian Economy Reeling from Drought and Fires,” The Guardian, February 5, 2020. https://www.theguardian.com/business/2020/feb/05/coronavirus-threatens-australian-economy-reeling-from-drought-and-fires; Ed Johnson, “Australia Says Economy to Take ‘Significant’ Hit from Virus,” Bloomberg, February 5, 2020. https://www.bloomberg.com/news/articles/2020-02-05/australia-says-economy-to-take-significant-hit-from-virus

4Alistair MacDonald and William Boston, “Global Airlines Brace for Coronavirus Impact,” The Wall Street Journal, February 26, 2020. https://www.wsj.com/articles/germanys-lufthansa-makes-cuts-as-it-braces-for-coronavirus-impact-11582712819

Yields of Dreams: An Informed Look at Dividends

Many Investors in recent years have developed a preference for stock dividends to generate income needs. In today’s historically low interest rate environment, such stocks are more attractive than the familiar bonds or bank CDs they used to buy and hold.

But dividend strategies with stocks are not the only way to produce income. Moreover, investors should be aware of the potential tradeoffs and unfamiliar investing risks that accompany a portfolio managed to provide income primarily in the form of dividends. While dividend-paying shares appear to have a reliable schedule (quarterly, in many cases), much like the bonds conservative investors favored for so many years, the cash to fund a dividend must come from somewhere, and it does so very differently than a bond.

We know the price of a stock is influenced by all expected future cash flows to the firm, and thence to shareholders. If cash is paid today in the form of a dividend (rather than be retained for future growth), the stock price — and total market capitalization — of the issuing company should be expected to fall by a corresponding amount, such as in hypothetical Portfolio A in Exhibit 1, below. That means, all else being equal, shareholders who receives a dividend are left with a equity holding made less valuable by that dividend.

Chart comparing methods of income generation Chart showing income via stock sale - Portfolio B


A simple alternative method of raising cash for income when needed is to simply sell shares. Firms like Charles Schwab have $0 commissions with on-line trades. Exhibit 1 compares these two methods of generating income by contrasting hypothetical Portfolio A with the similarly valued Portfolio B. While Portfolio A receives income through a periodic dividend payout, Portfolio B generates it through a stock sale.

The investor in Portfolio A, in which a dividend is issued, ends up holding the same number of shares as were held prior to the dividend payout — but we assume that those shares have declined in value. The investor in Portfolio B holds a reduced number of shares with no value decrease because of no dividend payout. The two approaches arrive at the same place—both investors end up with $100 in cash and $1,900 in stock, notwithstanding potential trading costs or tax implications, if any. But the dividend approach has potentially greater downsides in contrast to the stock-sale approach.

First, the average proportion of U.S. firms paying dividends was about 52% from 1963 through 2019,1 meaning an investor focusing only on high dividend stocks excludes nearly half of all investible U.S. companies. A second consideration is that a dividend’s value, while not subject to stock price fluctuations, isn’t guaranteed. Just 10 years ago following the financial crisis, more than half of dividend-paying firms cut or eliminated those payouts.2 More recently, a venerable company that had consistently paid dividends for more than a century, General Electric, slashed its payout to just one cent a share.3 The UK’s Vodafone Group cut its full year dividend for the first time in two decades.4

Thirdly, investors lose flexibility with the timing and the size of payouts when they rely on company-issued dividends. With stock sales, an investor determines both the amount and the best income schedule for them. And lastly, dividend-focused investors tend to substantially under-diversify, typically owning only a limited number of stocks, thereby incurring unnecessary risk—the fewer the stocks, the greater the uncompensated risk.

Graph showing income facts - Exhibit 2

Source: Dimensional calculations using Bloomberg data. For constituents with reported returns of less than one year, returns shown since earliest date available. S&P data© 2020 S&P Dow Jones Indices LLC, a division of S&P Global. Dividend yield is calculated as the sum of dividends paid in calendar year t divided by end of year t-1 price.


When considering an investment strategy, it is equally important to assess the potential total return, which accounts for capital appreciation (or loss) alongside dividend income. High dividend yields does not mean high total returns. Exhibit 2 plots the trailing 12-month returns of S&P 500 Index constituents as of December 31, 2019 (each dot representing a company). Those companies with greater dividend yields—the dots located higher up the vertical axis—weren’t consistently those with a higher total return.

The need to prioritize income generation may be important for many investors, but that objective should not preclude other important investment considerations, such as diversification and flexibility. While the use of stock sales instead of dividends to create cash flow may involve trading costs and tax considerations, there are growth benefits for investing in companies that don’t currently pay dividends. An informed investment planning strategy focused on income should balance broader concerns such as longevity that do not exclude safer allocations into fixed income and annuity income approaches.


1Source: Dimensional, using data from CRSP. Stocks are sorted at the end of each June based on whether a dividend was issued in the preceding 12 months.

2Stanley Black, “Global Dividend-Paying Stocks: A Recent History” (white paper, Dimensional Fund Advisors, March 2013).

3Janet Babin, “GE cuts dividend to a penny per share. Why bother keeping it at all?M” arketplace, American Public Media, October 30, 2018.

4Adrià Calatayud, “Vodafone cuts dividend after swinging to 2019 loss.”M arketWatch, May 14, 2019.

Tuning Out The Noise

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of simply staying invested.

For investors planning their goals, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors. Headlines from the “lost decade”1 can help illustrate several periods that may have led market participants to question their approach.

  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All‑Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now more than a decade behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can become very volatile and recognize that, in the moment, doing nothing may seem paralyzing. Throughout these ups and downs, however, if one had hypothetically invested $10,000 in US stocks at the end of 1999 and simply stayed invested and done nothing, that investment would be worth approximately $33,500 today.2

When faced with an ongoing barrage of short-term noise from the media, it is easy to lose sight of the potential long-term benefits of simply staying invested. While no one has a crystal ball, adopting a long-term perspective can change how you can view market volatility and help you look beyond the headlines.


Part of being able to avoid giving in to emotion during unexpected periods of uncertainty is having an appropriate asset allocation that is aligned with your personal willingness and ability to bear risk. You must realize that if investment returns were guaranteed, you should not expect earning an equity premium greater than a risk-free rate of return.

Fundamentally, risk and expected return are inextricably related. Constructing a portfolio that you can tolerate, understanding that all uncertainty is at the core of investing, and sticking with an informed planning is much more likely to lead to a better investment outcome for planning goals like retirement.

However, as with many aspects of life, most of us can benefit from some help in reaching our goals. Just as athletes work closely with a coach to increase their odds of winning a medal, many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track.

A qualified and experienced financial professional can play this vital role for an investor. A true financial professional, such as a Certified Financial Planner® or a Wealth Management Certified Professional® can provide the expertise, perspective, and encouragement to keep you focused on where you want to go and help you stay in your seat when it matters most.

A recent survey conducted by Dimensional Fund Advisors (see Exhibit 1) found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with their trusted financial professional.

Having a strong relationship with a trusted financial professional can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and peace of mind. That’s the difference a true financial professional can make.

Successful retirement and wealth planning is more than investment management. A competent CFP® wealth management professional can help you plan your future with confidence.

Exhibit 1:

Value Received from your Advisor graphic

1For the US stock market, this is generally understood as the period inclusive of 1999–2009.

2In USD. As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 invested on January 1, 2000, and tracking the S&P 500 Index, would have grown to $33,500 on December 31, 2019. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.

Source: Dimensional Fund Advisors LP.

Hindsight Is 20/20. Foresight Isn’t.

The year 2019 provided many examples of unpredictable markets.

Interest rates that U.S. policy makers expected to rise, instead fell. American consumers’ confidence weakened as the year began,1 and news headlines broadcast fears of a pending economic slowdown. Market returns of the month of December 2018 were the worst for any December since 1931.

Many fearful investors who temporarily chose to move from stocks into cash and intended to stay there “until things looked better” missed some of the biggest U.S. stock market gains of the year. As of the end of November, the S&P 500 was about 25% for the year on a total-return basis. That puts this year on course for the best showing since 2013.

Outside the U.S., Greece—the site of a recent economic crisis so dire some expected the country to abandon the euro, and whose equity market lost more than a third of its value last year—has had one of the most robust stock market performances among emerging economies in 2019. On top of that, Greece issued bonds at a negative nominal yield, meaning investors actually paid for the privilege of lending to its government.

These events remind us that the game of making predictions can be costly for players.


A closer look at interest rates and bond markets shows just how unpredictable normally staid fixed income asset performance can be. Going into 2019, Federal Reserve officials expected economic conditions to support raising a key interest rate benchmark twice. Instead, over the course of the year, those policy makers lowered rates three times.

In the global capital market for U.S. Treasuries — where participants competitively set interest rates — the yield curve that tracks Treasuries inverted for the first time in more than 10 years. See Exhibit 1, below. Some long-term yields fell below short-term yields over last summer. What’s more, while yields on medium- and long-term bonds were at historically low levels early in the year, yet they fell lower. Investors who made moves into cash or short-term bonds betting on rising yields were severely disappointed as events transpired. Bond returns in 2019 turned out to be the best in years. But those who stuck with a sound planning strategy were able to profit.

Graph: Shifting Curves Yields on US Treasuries of various maturities since the end of 2018


In equity markets outside the U.S., anticipating events wasn’t any easier. Exhibit 2 shows no evidence that links good performing markets in 2018 and those that excelled in 2019.

Among the 23 developed market countries,2 only one country was a Top 5 performer for both 2018 and 2019: the U.S. Last year’s strongest performing market — Finland — ranked 22nd this year through the end of October.

Among emerging markets, Greece swung from a 37% decline last year to more than a 37% advance for the 2019.

Graph: Changes in the Ranks Performance of equity markets in 23 developed and 24 emerging economies


There is no compelling or dependable way to forecast stock and bond movements from historical returns, and 2019 was a case in point. Neither the mainstream prognostications nor media commentators predicted the strong market performances during 2019.

The market’s pricing power works against even those many professional investors who try to outperform through stock picking or market timing. Most will fail. Among mutual funds, for instance, only 18% of U.S. equity mutual funds and 15% of fixed income funds have both survived and outperformed their benchmarks over the past 15 years.3

We believe rather than making investment decisions based on predicting the direction of financial markets, a wiser strategy for successful planning is to hold an allocation of asset classes that focus on systematic and robust drivers of potential returns — structured from great ideas in finance grounded in economic theory and leading academic research.

History shows that capital markets have rewarded long-term investors. Investors broadly diversified across asset classes from around the globe were better positioned to enjoy returns that the markets delivered in 2019. This is true not only this year, but was last year and will be next year. Professional investment management grounded on modern financial science is a timeless approach.

Building wealth for successful retirement is more than successful investing. Tax and asset protection planning are also important. Find a competent CFP wealth planning professional to help you look ahead to retirement with confidence.

1Based on readings from the Conference Board Consumer Confidence Survey and the University of Michigan Index of Consumer Sentiment.

2Markets designated as developed or emerging by MSCI.

3Mutual Fund Landscape 2019 (Dimensional Fund Advisors) for period ending December 31, 2018 from CRSP data, University of Chicago.

7 Smart Planning Ideas for Year-End

The fourth quarter is still an opportunity for some smart tax planning.

1. Remember to maximize retirement saving accounts

If you’ve turned 50, you’re able to make a catch-up contribution of $6,000 in your 401(k) or 403(b) plan. It’s not too late to catch up for 2019—and also make an election for 2020. Also, anyone with earned income can contribute to a traditional IRA.1 Only the tax deductibility of an IRA contribution may be limited. Unfortunately, Roth IRA contributions have income limits—but non-deductible IRA contributions may be converted into a Roth account without tax impact in some instances.

If you’ve not already maxing out your 401k or 403(b) for this year, you can still increase paycheck deferrals in November and December. And in January, you can make an IRA contribution for 2020. Why not do it early and get a faster start on your savings plan?

IRA chart

2. Review your capital gains and losses for the year.

Mutual fund capital gain distributions typically are announced during the fourth quarter, in addition to stock and fund gains and losses you may have from previous trades. After taking distributions into account, what should you do? If you are in the 22% or higher federal tax bracket, “tax-loss harvesting” may make tax sense. You can “harvest” losses in excess of gains but are limited to taking not more than $3,000 in losses in excess of gains in 2019. Losses not used this year can be carried forward indefinitely for tax purposes.

The long-term capital gain tax rate in the two lowest marginal tax brackets (10% and 12%) is 0%. If you have projected taxable income of less than $51,675 for single filers, or $103,350 for married filing jointly (assuming using only standard deductions for those under age 65), you may recognize long gains taxable at a 0% tax rate. Such tax-gain harvesting techniques will seem even smarter when tax rates increase once again.

3. Review potential itemized deductions for 2019.

Surveys indicate that fewer taxpayers itemize because of increased standard deduction. The IRS allows every personal taxpayer to take a standard deduction without itemizing. To benefit from filing a Schedule A for itemized deductions, total deductible items must exceed $12,200 for singles or $24,400 for marrieds. (Some states like New York still have the previous much lower itemized deduction allowances.) Due to the federal state and local tax (SALT) $10,000 deduction limitation, and mortgage interest deduction limitations, the new federal standard deduction applies to nearly 90 percent of taxpayers.

Standard deduction chart

Apart from those few who incur higher insurance premiums and substantial uninsured health-related expenses, one deductible item you can control are charitable contributions. Let’s see how smart planning can leverage contributions for tax savings.

First, contributions are deductible only in the year they are made. So you must make charitable donations by year-end to take them this year. Therefore, donations charged to a credit card before the end of 2019 will count for 2019—even if the credit card bill isn’t paid until 2020. Also, letters with checks must be postmarked in 2019 to count for 2019.

When planning, consider the potential tax-leverage of gifting appreciated securities instead of cash. Gifting $50,000 in publicly traded stocks (or appreciated mutual funds) with a cost of $10,000 could save up to $9,520 in tax ($40,000 X 23.8%); plus, you still receive a charitable deduction. The top marginal tax bracket rate possible for federal long-term capital gains is 23.8%. States like New York can tax up to an additional 8.82%, and not even offer an offsetting federal itemized income tax deduction on Schedule A.

4. Advanced wealth planning: Qualified charitable distributions.

If you are charitably inclined, at least age 70½, and modest itemize deductions, a qualified charitable distribution (QCD) may be a smart solution. A QCD allows tax-free transfers up to $100,000 directly from an IRA to a qualifying charity. Also, a QCD must be completed by December 31st for a given current tax year.

This technique is ideal for those who do not need the income but are required to make a minimum distribution (RMD). The QCD can be made in place of an RMD. It also makes itemizing that deduction unnecessary, and perhaps avoids the need for a Schedule A.

Donating a QCD correctly to a charity not only reduces both adjusted gross income (AGI) and taxable income but may reduce higher Medicare premiums in the future by not crossing $85,000/ $107,000/ $133,500 levels for singles, or $170,000/ $214,000/ $267,000 for couples, potentially saving up to $7,267 a year for higher income couples.

Additionally, due to making a QCD rather than taking RMD may help the AGI fall below $250,000 for a married filing jointly couple or $200,000 for a single individual. In that case, investment income would not be subject to the federal 3.8% Net Investment Income Tax on capital gains. And for some retirees choosing to live a relatively modest lifestyle while also inclined to make substantial charitable gifts, in some cases their Social Security subject to income tax could be reduced in some years.


Proactive income distribution and tax planning before year-end can overcome an inability to itemize charitable deductions in some years due to the federal standard deduction.

Mr. and Mrs. Smith, ages 55 and 54, have these projected itemized deductions for 2019:

Itemized deduction chart

This is less than the standard deduction of $24,400, so no itemized federal tax return would be submitted. (The problem would be worse once the home mortgage is paid off and no interest remains to be deducted, and high New York taxes are capped.)

So what can the Smiths do to save taxes when they don’t make large charitable gifts each year? The technique is to “lump and clump.” Rather than gift $2,500 each year, the Smiths could “lump” four or even more years of charitable donations into a single year! By “clumping” those donations into a special charitable vehicle called a “donor-advisor fund” (DAF), they can make a series of $2,500 annual “grants” to their church or community or other causes.

Projected itemized deductions chart

This is more than the standard deduction of $24,400, so the Smiths are positioned to itemize and gain a true tax savings benefit from charitable contributions that they already planned to make in future years.

Although the Smiths may not be able to make $10,000 charitable contributions every year, by planning carefully in advance, they may “clump” $10,000 one year into a DAF. Thy would receive a tax deduction in 2019 for their entire DAF contribution. After that, the Smiths decide when to make grants and which charities will receive those grants. Meantime, monies are invested, and earnings are tax exempt. Done early in the year, their usual charity could still receive the $2,500 they planned on by the end of 2019.

Contributions to DAFs are not limited to $10,000 or even $100,000. For those who desire to make a big impact in their church, community or causes they care deeply about, and have an extraordinary income event in a given year (say from an employer bonus, exercise of stock options, or even the sale of a company), DAFs offer an exceptional opportunity to magnify your charitable giving without committing to any particular charity or timeframe for payout in advance.

Special note for greater tax savings: Donor Advised Funds accept appreciated securities as well as cash. Selling appreciated public shares contributed to a DAF has no tax impact.2

Donor Advised Funds chart

5. If you plan gifts to family or friends, do it by year end so you can give again next year.

You can give up to $15,000 to anyone and to any number of people without filing a gifttax return. If recipients have lower income than you, consider gifting highly appreciated securities, which removes the gain from your portfolio. Recipients with lower income will pay less tax on sale and they may even qualify for a 0% federal capital gain rate.

Don’t gift portfolio losers; you need them to offset your own gains, and donees won’t benefit from your loss position, but instead assume the lower value as their tax basis.

6. Don’t forget that today’s tax brackets are only lower temporarily.

Take advantage of current lower federal tax rates and consider the benefit of Roth conversions this year and in successive years while brackets remain low. Roth conversions are not necessarily costly. Pairing tax strategies can mitigate tax impact. For instance, charitable contributions to a DAF for 2019 could be matched to a Roth conversion. If a passive activity with suspended losses from a commercial property sale is unsuspended—a Roth conversion is a smart way to utilize those phantom losses. Unlike earnings limitations on annual Roth contributions, Roth conversions have no limits.

7. Why pay more tax now when you could pay less tax later?

Smart tax planning generally accelerates deductions and defers realizing income. While most income and expense may be beyond your control, some things offer you a choice. Consider deferring income from bonuses, consulting, self-employment or realizing capital gains—and taking advantage of IRAs and qualified plans. For deductions, you may be able accelerate charitable contributions, state income and property taxes, and sometimes interest payments.

Tax planning is not only a year-end exercise. For greater tax savings and higher net returns, find a competent CPA or CFP wealth management professional with experience in tax planning to mitigate the impact of taxes and so magnify your wealth outcomes.

1Traditional IRA Limitations Source: See IRS Publication 590. Those over age 70 cannot contribute.

2Please note that charitable substantiation requirements apply per IRA pub 1771: “A donor can deduct a charitable contribution of $250 or more only if the donor has a written acknowledgment from the charitable organization.” The donor must get the acknowledgement by the earlier of the date the donor files the original return for the year the contribution is made, or the due date, including extensions, for filing the return.

Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

Recent U.S. Stock Market Volatility

While recent volatility of American stock markets may worry some investors, market declines are a normal part of investing and part of the reason why stocks have a higher expected return than other investments.

Stock market declines in July and August, following last year’s losses in the last quarter of 2018 has renewed anxiety for some investors. While the media focuses a great deal of attention on daily price declines, volatility is simply a normal part of investing and a big part of the “risk” that “rewards” long-term investors in global markets. In the video link below, Nobel laurate Eugene Fama remarks that if “you have a long horizon over which you are going to be invested, then you don’t want to pay attention to the short-term.”

For investors who react emotionally during volatile markets — often inspired by increased media reporting and paying too much attention — timing the wrong response may be far more detrimental to their long-term results than any short-term drawdown impact.


Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year gains and declines that occurred during a given year. During this period, the average intra-year decline was about 14%. About half of the years observed had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops during several years, calendar year returns were positive in 33 years out of the 40 examined. This exhibit shows just how common market declines are. Moreover, it also shows just how difficult it is to say whether a large intrayear decline that happens to occur will result in negative returns over the entire calendar year.

In US dollars. US Market is the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Data is calculated off rounded daily returns.


If you tried to time the market in order to avoid potential losses associated with periods of increased volatility, how much would this help or hinder your long-term performance? If current market prices aggregate the information and expectations of all market participants, then timing cannot systematically exploit stock mispricing. In other words, it is unlikely that many investors will successfully time the market, and when they do manage it, usually it is a result of luck rather than skill.

Further complicating the prospect of market timing being potentially additive to portfolio performance is the fact that a hugely disproportionate amount of total stock returns occurs during just a handful of days. Since few, if any, investors can reliably predict in advance which days will have strong returns and which will not, the prudent course is to remain invested during periods of volatility rather than move into and out of cash. Otherwise, an investor risks holding cash on those few days when returns become strongly positive.

In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD,
provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index for 29 years beginning in 1990. It also illustrates the impact of missing out on just a few days with the strongest returns during all those years. The bars represent the hypothetical growth of $1,000 over the period — and what is lost by missing the best 1 day, best 5 days, best 15 days and best 25 days. The data shows that avoiding equity allocations for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer — in fact, if you missed the best 30 days of that 29-year period, the realized return from such an equity investing strategy only would be equivalent to risk-free one-month US T-bills!


While market volatility can be stressful for some investors, reacting emotionally and changing a sound long-term investment strategy in response to short-term declines lasting even a year or more could prove far more harmful than helpful. By adhering to a professionally developed investment management process, with an investment policy agreed upon in advance of volatile times describing the potential ranges of potential declines, investors may be better able to stay disciplined during those inevitable periods of short-term uncertainty. Conversations with a CFP® professional may help.

In a bit of practical advice, Professor Fama admonishes below: “You’re better off if you just don’t look. Basically, don’t pay a lot of attention to what is going on in the markets.”

When markets are messy and he’s not doing research or writing, Gene is known to go out and play golf or tennis. Maybe you should too.

still frame and link to video, "How Risk Tolerant Are You" by Eugene Fama