Contrarian Approach

There are many different investment approaches. One that has proven to be successful over the long- term is the contrarian approach. A contrarian approach means that an investor rejects or opposes popular opinion and invests in assets that are not as highly valued in the current day with the expectation that they will enhance returns over the long run. This does not mean that an investor buys assets that have decreased the most, but rather assets that have strong fundamentals and are out of favor in the current market. The key is focusing on fundamentals, not feelings. Over the long run, an investor will have a much higher rate of success with buying near the lows and selling near the highs. This approach forces an investor to have a long-term view and position their portfolio for the next five to 10 years rather than for the next quarter or year. As the great investor Warren Buffet has said, “Be greedy when others are fearful and be fearful when others are greedy”.

We continue to hold an overweighting in both emerging markets and international equities because their valuations are cheaper relative to US markets. Current value measures tell us that these equities have the most room to grow over the next five to 10 years as their valuations revert to historical levels. The graph below shows the expected returns over the next 10 years from Morningstar. This graph reflects similar analysis from other resources we trust.

We believe that by following a contrarian approach over the next 10 years in which we take profits (sell near the high) and rebalance into underperforming assets (buy near the low) the returns that are earned can be improved.  At the same time, we want to be clear that the current high-valuations for US equities and low starting yields for bonds will make for a challenging environment.

Investment Horizon, Diversification and Rebalancing

As we experience a rough October for global stock markets, we think that it is a good time to discuss equity returns and the benefit of having a long-term view. Over the course of the last 91 years, equities have returned about 10% annually. The 10% average gain comes with short-term volatility however. The chart below illustrates that the longer your holding period or investment horizon the more likely you are to experience gains. At Von Holt Financial Advisors, we preach a 5 year or greater investment horizon. As the chart below shows, having a 5-year horizon rather than a 1-year horizon reduces the chance of experiencing a decline from 26% to just 14% of the time. Stretching the time horizon to 15 years results in not a single period in which a loss occurred.

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What is IRMAA?

It is the Income Related Medicare Adjustment Amount. Put simply, the more income on your tax return, the more your Medicare Part B and Part D prescription drug premiums will cost.

It can be triggered by a large capital gain or an extra IRA withdrawal. With a little planning and the use of Qualified Charitable Distributions (QCD) you can possibly limit the impact. You can also appeal your situation if you have an unusual or non-recurring event.

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