Author: vmdev

The start of 2022 has been a challenging one for investors.  In the month of January, stocks were down 5.3% with some areas such as the Nasdaq losing nearly 9%.1 This comes amid a wall of worry related to the surging Omicron variant, inflation fears, and anxiety related to the Federal Reserve’s desire to increase interest rates.  While it’s certainly plausible these fears could derail the U.S. economy, history suggests these fears may be overblown.  Consider in the last five years a stock market investor would have more than doubled their money, despite multiple pullbacks along the way.2  Pullbacks are market drops that tend to be less than 20% and often correct themselves in less than 12 months.3  In that time, we’ve dealt with Brexit, the possible collapse of the Eurozone, the government shutdown of 2018, multiple impeachments scares with former president Donald Trump, the North Korean missile crisis, and a global pandemic, unlike anything we’ve seen since 1918.  Despite all these challenges, the U.S. economy grew by 5.5% last year, which is the best growth rate since 1984.4

These pullbacks can cause a lot of anxiety along the way, but hindsight shows us overreacting to them would have led to suboptimal results.  Investor selling during pullbacks is the main reason research has consistently shown over long periods of time that stocks earn an average of 10%, while the average investor makes just 2.3%.5 This atrociously bad number, comes down to fear, which can completely paralyze us at the worst possible time, leading us to sell our investments when we should be holding and/or buying.  This is not to say we should never play defense; in fact, while pullbacks cannot be avoided, market crashes are the real enemy and most investors would be wise to adjust their portfolios to soften the blow.  Market crashes (like the financial crisis) can take years to hit bottom, typically wipe out nearly half an investor’s money, and could take a decade to recover from.6  How does one know the difference?  Simply put, market crashes tend to correlate to recessions.  Over the past 50 years, there has been an 83% correlation between a market crash and a recession, while pullbacks have only shown a 38% correlation.7 

If we can understand when a recession is coming, we might be able to prepare for a market crash.  With an economy posting some of the best growth numbers in 40 years, and most leading economic indicators pointing to an expansion, the probability of recession is low.8  And while investing never affords us the luxury of absolute certainty, we can confidently say the latest market volatility is a pullback, not a market crash.  Investors would be wise to temper their anxiety and not overreact to the current volatility.  Just like it did in the past, we believe the current downtrend is temporary and will likely correct itself later this year.

 

Source: VCM’s Recession Risk Update – February 2022

 

Source: 1,2, 4 & 6 yCharts.com

Source: 5 Dalbar – Average Investor Return

Source: 3,7 & 8 Anatomy of a Recession – Clearbridge Investments

 

Verde Capital Management, Inc. is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future returns. Advisory services are only offered to clients or prospective clients where Verde Capital Management, Inc.  and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Verde Capital Management, Inc. unless a client service agreement is in place.

What a year!  I don’t know about you, but it feels like 2020 and 2021 merged into one loooong year.  Anyone else feeling like we all need a month long vacation in a beach hut or a peaceful forest cabin?  What would that Federal legislation be called?  Relax America?  Vacations to Support Mental Health?  (Insert sarcasm here… although I fully support everyone taking a vacation in 2022… go, start checking out dream lodging on Airbnb!).

 

9!

 

Despite the exhaustion many of us have experienced, and are experiencing from the last two years, let’s talk about ways to tee up 2022 for a less tiring year.  At least financially speaking.  Pull on your “Adulting” hat, grab your fav beverage and note taking paraphernalia.  Deep breath, and…

 

8!

 

Here we go!  Now is a great time to review your spending habits.  Wait, what did you just mutter under your breath?  You’d rather binge watch holiday movies on The Hallmark Channel?  Nope, we’re gonna do this and get you ready BEFORE New Year’s Eve for your mandatory financial health resolution. (You can toast your awesomeness on NYE with a glass of bubbly knowing you already thoughtfully prepared your financial goals for 2022.  Go on with yo’ bad self!). 

 

7!

 

If you have an app like Mint, or a spending tool on your banking platform, brace yourself and take a peek.  Be honest with yourself.  Are you comfortable with your spending habits, or did your stomach twist up and you visibly cringe over the results?  Regardless of which knee jerk reaction you had, take a deep breath and jot some notes down (honest ones… these are just for you, so don’t sugar coat them).  

 

6!

 

Now, take a sip of your fav beverage, and check in on your savings.  Look at your balances and performance in your retirement account.  Do you have an HSA or FSA?  Take a peek at those if you do.  Have an emergency fund? (Most people don’t, so no judgment either way).  Do you have enough in that fund to live off of for a month or three?  Lastly, check out your toilet paper stock… did you over buy during the Great Toilet Paper Shortage of 2020 and still have some left over?  (This has nothing to do with finances, I’m just curious to see if the memes from last year were accurate, lol).

 

5!

 

Take a sec to breathe, you’re doing great!  So… did you open an investment account to invest in meme stocks or dip your toe into options trading?  Or did you already have an investment account?  Buy some crypto on Venmo or in your Coinbase wallet?  If you answered “yes” to any of these questions, I bet you can guess what I’m going to say… yup, log in and check out your performance!  Are you happy, shoulder shruggingly okay, or did your head hit the table when you dropped it in disgust?  Don’t worry, I’ve got some good advice for you, just keep reading and doing.  You’ve got this!

 

4! 

 

Brace yourself.  It’s time to check out your debt (if you just screamed at the screen because you wanted to skip this part… I feel you, I’ve been there too).  It’s like ripping off a band-aid, just do it!  List out your credit card debts, your student loans, car loans, mortgage, home equity loans, all of them.  Done?  If you don’t feel overwhelmed right now, I’m sincerely proud of you and applaud your hard work to reduce or eliminate your debt!  If you feel scared, depressed, or anxious about your debt level, that’s okay too… just don’t allow yourself to get stuck in these emotions.  We’ve got work to do.

 

3!

 

So now we have a full view of your financial puzzle.  Good news is the pieces to this puzzle are interchangeable, so if you don’t like what you see, we can change that.  How?  Well, not through get rich quick schemes, multi level marketing, or finding that pot of gold at the end of the rainbow.  It’s going to take time, dedication, and some good ol’ fashioned honesty.  There’s no fast fix to finances. 

 

Love the picture you built?  Go ahead and do a happy dance!  Celebrate!  Then sit down and keep reading.

 

2!

 

Here’s where you write down everything you love and hate about your current financial situation.  And I do mean everything.  Hate your tax bill?  Want an emergency fund?  Student loans feel insurmountable?  Want better performance in your 401(k)?  Happy with your savings level?  Write it down.  

 

Then write down goals for yourself for every item.  Don’t leave any out.  

 

1! 

 

So now what?  There are a multitude of options.  First, go talk to your financial advisor and show them everything you just worked out.  Don’t have a financial advisor?  Hire one… like the savvy advisors at Verde Capital.  Or at your local bank or credit union.  Or an interactive app.  Believe me, it helps to have an objective supporter in your corner when it comes to your finances (just don’t buy or sign up for any products!).  

 

Second, post those notes in a spot where you can see them.  Hold yourself accountable so you can work towards a better financial future in 2022.  Are you going to meet all your goals in 2022?  No, but you’ll make progress if you stick to it and remember that financial health is like physical health: both take regular hard work to maintain and improve!  

 

Third, set rewards for yourself when you accomplish goals.  Nothing extravagant, but something that makes you happy nonetheless.  List those out next to your goals where you posted them on your fridge.

 

Fourth, schedule time to measure how you’re doing EVERY WEEK!  Don’t wait for a month to check on your spending, debt, savings, or meme stock performance.  Check in every week and make notes.  Be honest.  What can you do the following week to work towards your goal?  It doesn’t need to be huge, in fact it should be a small, realistic step.  

 

Fifth, don’t be too hard on yourself if reaching your specific financial security and wellness goals takes longer than you originally planned.  That’s life my friend.  Just keep working towards your goals, keep your head up, and keep moving forward.

 

HAPPY NEW YEAR!

 

From everyone at Verde Capital Management, we wish you a wonderful, safe, and bountiful 2022!

The holidays are a time for creating memories, celebrating the joys of family and friends, enjoying delicious food, and buying thousands of dollars of gifts… (insert record scratch here)… wait, that last part isn’t right!  

 

It seems the holidays are quickly becoming a reason to buy and this year is no exception.  Large retailers have been pushing consumers to purchase holiday gifts since September due to supply chain challenges, leading some to purchase gifts often and early.  I’m not sure if these challenges have worsened or improved at the time of publication since this article was written in early November.  Regardless, let’s review some ideas for those of you who may have left your holiday purchasing until now.

 

First, the holidays are more than just buying the perfect gift for a loved one.  Sure, everyone adores a beautifully wrapped package, its contents selected with love.  However, no one wants their loved one going into debt for months or years to come.  If you haven’t already, make sure you set a budget for your holiday spending and STICK TO IT!  

 

Second, when building your budget make sure to include everyone: family members, friends, co-workers (ahem, your delightful presence is gift enough), your children’s teachers, caregivers, etc.  Then evaluate if you can give the gift of time instead of a gift purchased with your hard earned money.  Be creative and sincere, and don’t give a gift of time if you’re not really interested in spending time with that person.  

 

Third, gift cards are great budget-friendly gift options.  Crafting a well written note to accompany these often maligned gifts can make one mean just as much as that fancy coffee mug with cat cartoons printed all over it that’s sitting in your Amazon cart (hit “delete” don’t “save for later”).

 

Fourth, try shopping locally.  There are some amazing artisans, and organizations in your area with an abundance of beautiful gift options.  While I appreciate the speed and convenience of shopping on my phone with large retailers, I truly enjoy selecting unique presents from a local vendor.  You can also check out websites like Etsy (just be sure to check on shipping costs before you buy!).

 

Fifth, if you’ve already completed your shopping for the season and are currently wondering how to dig out from under the mountain of brown cardboard boxes and shopping bags (and are avoiding looking at your credit card bill), have no fear.  You can still return unwrapped and unused gifts if necessary.  If that’s not an option, sit down with a plate of holiday cookies or your fav snack, and take a good hard look at what you spent.  Now is a good time to create a plan to pay off any accumulated holiday debt, and evaluate what your budget should be for next year.  

 

At the end of the day, make sure you spend time with those you love this holiday season – the memories you’ll create with them are more important than any gift you can purchase!

 

Verde Capital Management, Inc. is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future returns. Advisory services are only offered to clients or prospective clients where Verde Capital Management, Inc.  and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Verde Capital Management, Inc. unless a client service agreement is in place.

What does love mean to you?  Is it the sweet smile and bright eyes of a joyful baby looking up at you as they take their first steps?  Is it the small hand of a child clutched in yours as you explore the world?  Is it the hug of a friend that fills you with comfort, or the laughter of the same friend as you crack up reminiscing about shenanigans long since past?  Or the gentle caress of a lover in the early morning light?  The breaking of bread with family and friends celebrating a milestone, holiday, or achievement?  The quiet beauty of sitting next to the love of your life just being and enjoying a sunset?  Or caring for a parent who can no longer do so for themselves without help?

 

All of these moments may define love to you.  Or just some.  Or none that I’ve listed here because let’s be honest, love is measureless and boundless and I would have to write for the rest of my life to even come close to identifying even a small measure of moments that may define love for each of us.  Love is a concept that has challenged philosophers, poets, writers, scientists, and humans for time immemorial.  

 

This post isn’t going to attempt to define love, or reveal a novel approach on how to find it, or how to keep it.  This is a blog meant to encourage quiet reflection regarding love’s worst enemy.  Time.

 

Who do you love?  Love comes in many forms and isn’t regulated to just romantic relationships.  I love my boyfriend, my family, my dogs, my friends, my coworkers (no, I didn’t get paid to add that bit), and many more.  

 

Who do you feel loved by?  I’m gonna personally ditto that last list (yes, I just referenced Patrick Swayze’s famous line from the movie “Ghost”). 

 

How do you love?  Is it through deeds and actions performed to honor and support your loved ones?  Is it through providing for their needs and wants via hard work, frugality, and planning?  Is it through teaching lessons learned and wisdom gained through your journeys?  Is it through just spending cherished moments with them and creating memories to last when distance separates you?  Is it through generosity shown with creature comforts or momentous gifts?  All of these ways of showing love are genuine and wonderful, so don’t go judging which is best.  

 

However, we can all probably do better at expressing our love to those we love, especially when we lose focus in the midst of the hustle and bustle of our everyday lives.  I encourage you to take the time to show your love however suits you, and them, best.  Be spontaneous or plan it out – just be sincere and don’t eat a ton of onions and garlic before doing so (even good friends don’t want to smell dragon breath from across the table!).

 

When do you love?  I hope your answer is every moment of every day.  That’s not a mushy gushy statement either.  In the back of my mind I remind myself I work every day to provide for my family.  I cook food regularly to feed their tummies and to bring joy.  I craft or select gifts to celebrate or “just because”!  I make time to just catch up and be present.  I support my parents by shouldering burdens and facing their challenges with them.  I’m not great at all of these most days, but I strive to be (heck, besides the work and cooking sometimes I feel I’m terrible at the rest).  

 

Why do we love?  I’ll leave that question to be answered by the philosophers and poets much wiser than I.  One common thread amongst them all: just remember to say it, share it, express it, and honor it in all of its many forms as often as possible.  We never know how much time we have with those we love, so make every moment count. 

 

“Ghost” (1990)

 

Molly: Do you love me, Sam?

Sam: What do you think?

Molly: Why don’t you ever say it?

Sam: What do you mean? I say it all the time.

Molly: You say ‘ditto’ and that’s not the same.

Sam: People say ‘I love you’ all the time, and it doesn’t mean anything.

Molly: Sometimes you need to hear it.  I need to hear it.

This article was written in January 2021; contribution and distribution limits have since changed.  Contact your Verde Advisor for more up to date information.

 

A new year brings forth a time of reflection on the previous year. In doing so, we are able to rejoice in a fresh start, create resolutions, and gaze onto the blossoming of goals and aspirations. Resolutions typically center around physical health. Now more than ever, I am reminded of the quote “The first wealth is health.”, penned by Ralph Waldo Emerson. Good health truly is essential to the prosperity of all!  

As you begin to think about your new year resolutions, consider incorporating both physical and financial health. One way to start is to utilize a health savings account (HSA) to its full advantage. A health savings account offers three key tax advantages: The first being,  contributions are tax-deductible, savings grow tax-free and may be invested for a potentially higher yield, and withdrawals for qualified medical expenses are also tax-free. A unique way to use these advantages is through a qualified HSA funding distribution.  

A qualified HSA funding distribution may be made from your traditional individual retirement account to your health savings account (HSA). An individual may make only one qualified HSA  funding distribution during their lifetime. The maximum qualified HSA funding distribution depends on the high deductible health plan (HDHP) coverage you have on the first day of the month in which you contribute, and your age as of the end of the tax year. For example, in 2021  an eligible individual, age 58, with a family HDHP coverage, may make a qualified HSA funding distribution from their traditional IRA of $8,200 ($7,200 plus $1,000 additional contribution (IRS  Guidelines, 2020) ). This would allow you to convert taxable dollars from your traditional IRA into potential tax-free dollars for qualified medical expenses in your HSA.  

As society progresses, people are living longer, and healthcare costs are rising at an accelerated rate, which could exceed the general cost of living. The average retirement age is 62 for most  Americans, three years prior to Medicare eligibility. Health care is expected to be one of your largest expenses in retirement, consuming a larger portion of your retirement income, meaning you must plan for said expenses. Along with your physical health resolutions, if you are still working and eligible, consider contributing to an HSA account as part of your financial health resolutions.  

An HSA account you set up to pay or reimburse qualified medical expenses you and or your family incur. Contributions remain in your account until you use them, and the HSA is portable,  meaning it stays with you if you change employers or retire.  

To qualify you must be covered under a HDHP, not on Medicare, and not dependent on someone else’s tax return. In 2021, an individual may contribute up to $3,600 (an additional  $1,000 if over 50 years of age) and a family may contribute up to $7,200 (an additional $1,000 if over 50 years of age). An HSA is one of many ways to begin to strengthen your financial wellness goals ( IRS Guidelines, 2021). 

IRS Guidelines. (2020, January 30). IRS. Retrieved January 4, 2021, from IRS – Health Saving Plans https://www.irs.gov/credits-deduction

 

Verde Capital Management, Inc. is a federally registered investment adviser. The information, statements, and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation, or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future returns. Advisory services are only offered to clients or prospective clients where Verde Capital Management, Inc. and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Verde Capital Management, Inc. unless a client service agreement is in place.

All individuals hold differing opinions on the nature of whether or not they believe Republicans or Democrats are better for the market. As humans, it’s in our nature to look for ways by which we can ‘predict the unpredictable,’ in this case: predict the ways in which the market will perform in accordance with the policies and practices of particular political parties. The fact of the matter is that thinking one party outperforms the other in terms of market performance is objectively untrue.

Figure 1. The S&P 500, 1929-2019: Historical Political Party of Presiding Presidents and Respective Market Performance

 

Examining Figure 1 above, data was collected on the market performance of the S&P 500 for the past 15 presidents, their time in office ranging from 1929-2019 (Slickcharts, 2020). Based on the number of years in office each president was situated, we were able to calculate the average annual rate of return for the market, during the length of their presidency. The average performance for each party actually reveals that Democrats have a marginally higher average market performance than Republicans, but so small a difference that it cannot be considered statistically significant, as the difference between performance is buried deep within the minutiae of the individual challenges the country faced on a year-to-year, president-to-president basis. Some of these factors will be discussed later in this post.

 

This graph makes evident a number of important concepts, the first being that the market has seen a general trend of increasing performance over the past century, with micro-fluctuations making up the larger macro-picture of the entire growth of the S&P. Regardless of which party is in the White House, we can see continued increases (BlackRock, 2020). In fact, $1,000 invested in the S&P 500 in 1926, would have grown to a sum of about $8.96 million by June of this year, with numerous inaugurations along the way (BlackRock, 2020).

 

Based upon the red line (Figure.1) indicating the year-to-year percent change of the S&P, we can also see some relatively consistent girations of the market (Macrotrends, 2020), which goes to show just how little influence the individual president really does have on the performance of the market. The cyclical nature of events that challenge the economic and societal standards of America at that respective time in history lead to the push and pull of the market, rather than the individuals in office.

 

An important distinction to make here is the difference between the market and the economy. While the two -in many ways- operate adjacent to one another, they represent two very different entities (Palacios and Ryssdal, 2019). The economy is better measured by things such as unemployment rates, workers wages, housing data, or levels of relative productivity such as GDP (Schieder, 2020). The market on the other hand is a reflection of the economy. Investors take the information the economy gives them and make predictions about where they think the economy is headed in the future, as well as where money will be flowing through the ever changing landscape of ways by which our system of goods and services reaches consumers.

 

So what does this all mean? We all have political convictions tied to beliefs that are shaped by our individual life experiences. Despite these convictions, we encourage you to look at the objective data presented surrounding market returns, and understand that the market is not a force than can ever be accurately predicted (much less attributed to the decisions or policy implementations of one party over another).

 

Every single president has seen their fair share of conflict and attempted resolution. Events such as international conflicts, recessions, civil unrest, health crises, natural disasters, and social movements come and go without warning, and present unique sets of challenges for each incumbent POTUS:

 

• Ronald Raegan(1981-1988): faced worst recession in 40 years, Iran-Iraq war escalated, the US bombed Libya
• George H.W. Bush(1989-1992): savings and loan crisis reached apex, faced issues regarding junk bonds, Tiananmen Square Massacre, the Berlin Wall falls
• Bill Clinton(1993-2000): Los Angeles riots, Midwestern US flooded, Fed raised the interest rates six times, fear of ‘Y2K’ computer speculation
• George W. Bush(2001-2008): Internet Bubble Burst, 9/11 Terrorist Attacks, US invaded Iraq, Oil prices soared
• Barack Obama(2009-2016): Subprime mortgage debt crisis, US recession, Unemployment topped 10%, Gulf of Mexico oil spill

 

As you can see, there is no presidential term that has not faced it’s fair share of challenges ultimately out of its administration’s control. As we currently see with Donald Trump, the booming market his administration realized was undermined by the Covid-19 global health crisis that wiped out nearly every bit of gain that he made over the course of the entire presidency, within a matter of days. The market has entirely rebounded, however there are many factors that are included in the success of a market that are much deeper than the policy decisions that are made while an individual is in office.

 

As discussed in previous blog posts, (see Carl Szasz’s Fireside Chat discussing the different types of bear markets) bear markets can be onset by a variety of different sources. Bear markets vary in severity depending on the nature of the onset of the market decline. For example the bear market we saw in 2008 is predicted to be much more severe than our current market decline due to the fact that in 2008, the economy and market suffered from foundational errors that made a successful rebound much more difficult that something such as the current health crisis. Coronavirus affected our economy in the way by which many parts of the economy were forced to be temporarily shut down due to mandated social isolation policies aimed at lowering the rate of virus transmission. 

 

Our goal at Verde is not to strip you of your political stance, but rather to give you confidence in the nearing election, that the market is not influenced by one party or the other. The market is reactive to the events that shape American history and the challenges that every day Americans will continue to face in light of the changing foundations of our socially distant, forward thinking world. Mathematics is free of political orientation, and when it comes to your investments, we take a mathematical and statistical approach that takes out the bias that can lead to irrational decision making. This post is for educational purposes only and is not intended to endorse any nationally represented or otherwise recognized political party over another.

 

Sources:

 

https://www.slickcharts.com/sp500/returns

https://www.macrotrends.net/2324/sp-500-historical-chart-data

https://www.marketplace.org/2019/09/30/the-stock-market-is-not-the-economy/

https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market

 

Verde Capital Management, Inc. is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future returns. Advisory services are only offered to clients or prospective clients where Verde Capital Management, Inc.  and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Verde Capital Management, Inc. unless a client service agreement is in place.

Over the past several months, you may have heard in conversation with your advisor, or through one of our fireside chats, the concept of the Wisdom of Crowds(WOC). And while you may have been offered a brief explanation of what this concept/phenomenon is, ultimately this topic could be talked about in much greater depth, as the examples and implications of the ideas surrounding the WOC are much further reaching than what they might first seem.

 

The purpose of this post is to shed a bit more light on what exactly the concept surrounding the WOC is, discuss various examples of the places and spaces it can be seen throughout time and history, and in turn discuss how we’re leveraging this idea here at Verde to offer the best possible services we can to you at clients. Perhaps the best way to convey this concept to start, is to quote one of the first individuals known to have engaged with thought surrounding the WOC, Aristotle in 350 BCE:

 

“it is possible that the many, though not individually good men, yet when they come together may be better, not individually but collectively, than those who are so, just as public dinners to which many contribute are better than those supplied at one man’s cost.”

 

Put in simple terms, the wisdom of crowds acknowledges the individual and diverse experiences of each person within a group, and takes into account each person’s respective level of expertise on a particular topic in order to come to a consensus on an answer that’s better than any individual would be able to produce on their own. The idea here is that each individual’s response has bias, but when the average is taken of all responses, this goes in some way to cancel out the outliers of people who might know less than others on a particular topic.

 

The quintessential example of the WOC brings us to the West of England Fat Stock and Poultry Exhibition in 1906. The scientist and statistician Francis Galton asked 787 people in attendance at the exhibition, how much they individually thought a particular steer weighed. When all the individual’s responses were collected and the average was taken, the collective guess for the weight of the steer was 1,197 pounds. The actual weight of the steer? 1,1989 pounds.

 

This astonishing finding doesn’t stop here however. These findings of how crowds can work in tandem to deduce solutions to complex issues can also be seen in the popular television program, Who Wants to Be a Millionaire? For those unfamiliar with the show, an individual is asked a series of increasingly difficult questions, winning increasing amounts of money for each question they complete successfully. The participant also has a series of “lifelines” that allow them to ask different individuals for help on a question they may be stumped on. One of the lifelines, “Ask the Audience” allows the audience to be pulled for what their guess is on the answer to a certain question. When this particular lifeline is used, the audience is seen to be accurate in their most widely selected answer to the question, some 95% of the time.

 

We’ve seen how the WOC could be used to answer some arbitrary questions such as the weight of a cow, or the answer to trivia questions, but what importance does this have to decisions that hold a little more weight in the real world? We’re glad that you asked! A more serious example of this theory in practice relates to the Challenger space shuttle accident, and the stock market.

 

In 1968, the Challenger space shuttle was destroyed just 73 seconds after it’s launch, unfortunately leading to the fatalities of all 7 astronauts who were on board. The stock market is always responding to major changes and stories in the news, due to inventors concerns as to the profitability of certain companies that will in effect be held responsible for certain events ect. Almost immediately after the explosion, investors began selling stock of the 4 contractors involved with the launch of the challenger: Lockheed, Rockwell International, Martin Marietta, and Morton Thiokol.

 

By the time trading had ended for the day, Morton Thiokol’s stock had fallen by almost 12% in comparison to the 3 other companies who had only fallen by about 3% each. In other words, the stock market felt that Morton Thiokol was to blame for the disaster, however no firm evidence could be given either way as to who was to blame. 6 months later, it was found that Morton Thiokol was indeed to blame for the accident, on account for the faulty O-ring seals produced by the company.

 

Even in situations where there’s not a direct question being asked of a group of individuals, collective thought is at play, and can lead to some astonishing findings.

 

In order for the WOC to effectively and accurately be used, four different elements must be present: 

1. Each individual must make their guess independent of each other, and without the knowledge of what other people are guessing,
2. Each individual whose response is being collected must represent a diversity of thought. The crowd should be comprised of individuals with varying levels of expertise on the particular topic at hand,
3. Individuals should be able to make their guesses by drawing on their own private knowledge,
4. There also must be a way to aggregate the responses form the group in order to find an ‘average’ response, which is not always the case with any possible question that you could ask a group of people.

 

How is Verde putting the Wisdom of Crowds into practice? Since 2015, we founded and have been utilizing our investment committee: a group of individuals within our company with diverse opinions and experiences with investment selection. Each quarter, our investment committee meets in order to discuss the selection and allocation of investments within our client’s portfolio models, by which performance is ultimately determined. It is the goal of our investment committee to make the best possible choices harnessing the wisdom and input of all group members in order to make the best decisions that benefit our clients.

 

It doesn’t just stop at our investment committee however, the Wisdom of Crowds has been integrated into our office culture, so as we continue to expand our team of individuals from all sorts of backgrounds, we can become stronger and more accurate decision makers.

 

 

In 1968, the US navy lost one of its submarines on the ocean floor, furthermore it seeked to find the wreckage. Unfortunately, intelligence was unable to deduce a small enough location to even look for the submarine. John Craven, a naval officer, concocted a series of scenarios by which the submarine’s location could be found. He gave a series of mathematicians, submarine specialists, and salvage men the different scenarios of where the submarine may have landed, and asked them each individually to give their best guess as to how likely their given scenario was. Craven used an aggregate theorem called Bayes’ theorem, which allowed him to calculate how new information about an event changes you pre-existing expectations of how likely an event was to occur.

 

When all responses from the different scenarios were aggregated, and a location was decided upon for the submarine’s likely resting place, the actual resting place of the submarine was found to be only 220 yards away from what Craven’s calculations had told him. Verde cannot predict the future of the market (as no person can), however we come together as a group of professionals with individualized specialties to help you navigate through uncertain waters.

 

Verde Capital Management, Inc. is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future returns. Advisory services are only offered to clients or prospective clients where Verde Capital Management, Inc.  and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Verde Capital Management, Inc. unless a client service agreement is in place.