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Financial Briefs SEPTEMBER 2019 Dow Theory: Curbing Emotional Investing

n addition to starting the compa- ry trend’s movement. Of course, primary trend in the mar- Iny that publishes The Wall Street no one ever knows in advance ket is driven by forces much big- Journal, (1851–1902) how trends will last (that’s a ger than any single individual, also lent his name to one of the most key principle of the Dow theory). cartel, breaking news, or rumor. popular U.S. stock market indexes And since market prices fluctuate • The stock indexes reflect all (the Dow Jones Industrial Average) from day to day, it’s dangerous to available information. The Dow and created a theory regarding make too much out of a single theory believes that everything major shifts in stock market trends. day’s movement. there is to know about a stock While neither Dow nor those who • Primary trends can’t be manipu- and the economy at a given mo- refined the Dow theory after him lated. While it may be possible ment is factored into the prices of believed they were creating a sure- for private interests to manipu- . This include hopes, fears, fire way to beat the market, they did late the price of one security for a and expectations of such factors believe that following its principles relatively period of time, as interest rates, earnings, could at least avoid the mistakes as- the Dow theory holds that the Continued on page 2 sociated with greed and fear. Three Assumptions When Should You Sell? Behind the Dow theory is a set of assumptions about how the stock ost information about stock in- lost all the profit, plus some of the market works: Mvesting seems to discuss buy- initial investment. • The stock market moves in ing, but to actually profit from a If selling is dictated by emotion broad cyclical trends. According stock investment, it must be sold. rather than a well-thought-out plan, to Dow, there are primary trends, For many , selling a stock is it is very likely to play out as de- which are long lasting (from the most difficult decision. scribed in the example above. A months to years), and minor The reason selling is difficult for good selling decision may leave trends, which don’t last long and some investors is the fear of missing some profit on the table, but it run in the opposite direction of out on future profits. Let’s say an in- should be determined by a rational the primary trend. Primary up vestor purchases a stock at $30 per analysis of valuation and price. The trends are bull markets and pri- share and decides to sell when the most successful investors do not mary down trends are bear mar- stock reaches $35 per share. But focus on by trying to kets — these are marked by when the stock reaches $35, the in- sell at the highest price; instead, peaks and troughs in price charts. vestor thinks it is doing so well that they focus on buying at one price Within these broader trends, it will surely rise more. The stock and selling at a higher price. there are secondary (minor) then drops to $31 and the If you have a difficult time with countertrends called corrections, decides to wait until it reaches $35 selling, you should consider using a which can retrace anywhere from again. Then the stock takes another limit order. This type of order will tumble to $24 and the investor just 33% to 67% percent of the prima- Continued on page 3 Copyright © Integrated Concepts 2019. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party as- sumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material. FR2019-0522-0102 2 Dow Theory Learning Lessons from the Stock Market Continued from page 1 f you pay attention to the stock he/she made a mistake, which is revenue, and product initiatives. Imarket, you can learn some psychologically difficult to do. Unexpected events can occur, but valuable lessons: When evaluating your stock in- usually they affect the short-term • The market tends to revert to vestments, objectively review the trend, creating what are called re- the mean. When the stock mar- prospects of each one, making action rallies. These soon lose ket has an extended period of decisions to hold or sell on that steam and the primary trend re- above or below average re- basis. sumes. turns, it has a tendency to re- • Make sure an investment will Three Primary Trend Phases vert back to the average return. add diversification benefits to According to the Dow theory, • Don’t chase performance. In- your portfolio. It’s common for major trends consist of three phases vestors often move out of sec- of varying length: investors to keep adding invest- Stage 1: Accumulation or distri- tors that are not performing ments that are similar in nature. bution. In this phase, the smart well, moving money to invest- This does not add much in the money — typically large institution- ments that are currently high way of diversification, while al investors like investment banks, performers. But the market is making the portfolio more diffi- pension funds, and mutual funds — cyclical, and often those high cult to monitor. start major buying or selling pro- performers are poised to under- • Check your portfolio’s perfor- grams. Initially, this looks like a sec- perform, while the sectors just mance periodically. Compare ondary countertrend, but trading sold are ready to outperform. your actual return to your target- on the major exchanges no- A classic example is technology ed return. Now honestly assess ticeably increases on up days, while stocks in early 2000. how well your portfolio is per- volume tends to be lighter on down • Avoid strategies designed to forming. Are major changes days. In a bull market, stocks are get rich quick. The stock mar- needed? cheap, but no one other than value ket is a place for investment, • No one knows where the mar- investors seems to buy them. In a not . When your ex- ket is headed. So don’t pay at- bear market, there’s a high level of pectations are too high, you tention to gloomy or optimistic enthusiasm for stocks, and few peo- have a tendency to chase after predictions. Instead, approach ple believe the bull market is over. high-risk investments. investing with a formal plan so Stage 2: The big move. In this • Don’t avoid selling a stock be- you can make informed deci- phase, there are many more days in cause you have a loss. When sions with confidence. zxxx which the indexes move in the di- selling a stock with a loss, an rection of the primary trend than in investor has to admit that the opposite direction. In bull mar- kets, there are strings of up days, one is concerned about safety of firms would show up in business for followed by shorter strings of down principal, while those who bought the companies that move the goods days, reflecting the spread of enthu- stocks at high prices have finally they make. siasm for stocks. In bear markets, given up and sold at a loss. For the second index to confirm the opposite occurs, as anxiety and The Indexes Confirm the the first, the Dow theory looks for pessimism mounts. The result is a New Trend both averages to be moving in the significant, long-term increase (bull For Charles Dow, the primary same direction. New highs or lows markets) or decrease (bear markets) trend was reflected in the Dow Jones in one index are accompanied by in the market averages. Industrial Average, which today highs or lows at the same time or Stage 3: Excess. The final phase comprises 30 stocks. But Dow also shortly thereafter in the other. of a primary trend is marked by ex- looked to another index to confirm The Dow theory isn’t intended tremely high levels of emotion — the emergence of a new trend. In his to help short-term traders. What it’s enthusiasm in bull markets and pes- day, that was the Dow Railroad designed to do is tip off long-term simism in bear markets — which are Index. Today, it’s the Dow Trans- investors to changes in the trend, so signs that the primary trend is about portation Index of 20 companies they can shift their money from to change. These extremes can be engaged in the shipping and trans- stocks to another asset class, like seen in the behavior of individual portation of manufactured goods, bonds or cash, during a full business investors: in bull markets, even the including marine transport, rail- cycle. most conservative investors are buy- roads, and trucking. The idea was a Please call if you’d like to dis- ing stocks. On the other hand, in the true change in the trend of business cuss this in more detail. zxxx excess stage of a bear market, every- activity in the big manufacturing

FR2019-0522-0102 3 When Should You Sell? Principles of Stock Diversification Continued from page 1 iversification is a practice that other industries that are perform- automatically sell the stock when it investors use to reduce risk ing well, you will be able to offset reaches your target selling price. D and maximize returns by investing some of that loss and some of the When to Sell in various industries that will most mental anguish that goes along You should decide when to sell likely react differently to the same with it. a stock at the time of purchase. Fol- event in the market. How Many Stocks lowing are examples when you When investing, there are two Should You Own? should consider selling based on types of risk one faces: While there is always debate your personal financial situation, as • Undiversifiable — Also known about how many stocks to own in a well as warning signs with the com- as systematic or market risk, this well-diversified portfolio, most ex- panies you are invested in: • If you are losing sleep over a par- is risk that all companies are ex- perts agree that 15 to 20 stocks ticular investment, it may be posed to and includes inflation, across different industries is opti- worth reducing your emotional interest rates, exchange rates, po- mal. This portfolio size is manage- distress to sell even at a small litical instability, etc. This risk is able, yet it allows you some room gain or loss. just the price of doing business, for losses. • If you need money in the next as all investors must assume it. The other extreme is overdiver- three years to purchase a home or • Diversifiable — Also known as sification where investors hold too send a child to college, you unsystematic risk, this is risk many stocks, which makes it should pull the money out while that can be specific to a company, almost impossible to know the you know you have it. industry, market, or country. Di- companies well. Not being knowl- • To help reduce tax payments, you versification can help manage edgeable about your stock invest- may want to look for investment and reduce this risk. ments can lead to making irrational losses to offset other gains. How to Diversify decisions, which will negatively • If your portfolio is shifting from Most experts agree that diversi- impact your portfolio returns. The your original asset allocation, fication is extremely important to key is to strike an appropriate bal- you will want to rebalance it to reaching long-term goals while mit- ance. get back on track. igating risk. A properly diversified Another impact of overdiversi- • Watch your stocks for a high equity portfolio should hold stocks fication is that an investor can be- price/earnings (P/E) ratio, which from different industries, company come indifferent regarding his/her compares the company’s recent sizes, valuations, growth rates, and investment decisions. If you’re earning to its stock price. If the countries to help reduce holding over 100 stocks, any indi- P/E ratio is high, it can be an in- and limit exposure to a permanent vidual stock might represent only a dicator that the stock is over- loss of capital. small percentage of the total port- priced. The more uncorrelated the folio. If the stock turns out to be a • Keep an eye on the company’s stocks in your portfolio are, the loser, it won’t cost you very much; competitive advantage. If others more you are limiting your risk ex- but if it provides great returns, you have come up with a new prod- posure. won’t reap the benefits either. uct or technology, they can erode Let’s say you have a portfolio of Diversifying your stock portfo- their market share. only automotive stocks and it ap- lio will help you manage the risk of • If the company makes a drastic pears there will be a strike. Most the price movements of your as- change in direction or manage- likely, all of the automotive stocks sets, but it can’t completely elimi- ment, it may indicate a problem will experience some drop in their nate risk and volatility. Please call with its business model. Research share prices, and in turn, you will if you’d like to discuss diversifica- the changes and follow your in- see a noticeable drop in value. tion in more detail. zxxx stincts about the company’s fu- However, if you have stocks in ture. • If a company’s sales are falling, it • When there is a trend of shrink- it is expecting lower earnings and may be signaling a problem. ing profits, it means the compa- less growth. While all companies will go ny’s expenses are rising faster Please call if you would like to through slumps, if other competi- than its revenues, and it’s having discuss this topic in more detail. zxxx tors are experiencing growth dur- a hard time keeping profits up. ing the same time period, it may • If a company cuts its be time to sell. payment, it may be a signal that FR2019-0522-0102 4 Business Data 18-Month Summary of Dow Jones Industrial Average, 3-Month T-Bill & 20-Year Treasury Bond March 2018 to August 2019 Month-end 9 27000 Indicator Jun-19 Jul-19 Aug-19 Dec-18 Aug-18 26000 Prime rate 5.50 5.50 5.25 5.50 5.00 8 3-month T-bill yield 2.09 2.07 1.95 2.47 2.08 25000 Dow Jones Industrial Average 10-year T-note yield 2.05 2.07 1.58 2.89 2.83 7 24000 20-year T-bond yield 2.34 2.37 1.86 3.03 2.91 23000 6 Dow Jones Dow Jones Corp. 3.22 3.21 2.86 4.40 3.84 22000 GDP (adj. annual rate)# +2.20 +3.10 +2.00 +2.20 +4.20 Industrial Average 5 21000 Month-end % Change 20000 Indicator Jun-19 Jul-19 Aug-19 YTD 12-Mon. 4 20-Year Treasury Bond Dow Jones Industrials 26599.96 26864.27 26403.28 13.2% 1.7% 19000 Standard & Poor’s 500 2941.76 2980.38 2926.46 16.7% 0.9% 3 18000 Nasdaq Composite 8006.24 8175.42 7962.88 20.0% -1.8% 2 17000 Gold 1409.00 1427.55 1528.40 19.3% 27.1% Treasury 3-Month & 20-Year 3-Month T-Bill 16000 Unemployment rate@ 3.60 3.70 3.70 0.0% -5.1% 1 Consumer price index@ 256.09 256.14 256.57 1.8% 1.8% 15000 0 14000 MAM J J A S OND J FMAM J J A # — 4th, 1st, 2nd quarter @ — May, Jun, Jul Sources: Barron’s, Wall Street Journal Past performance is not a guarantee of future results. 2018 2019 News and Announcements How Much of Your Portfolio nearing retirement age. If formulas work for you, the Should Be in Stock? general idea is to subtract your age from the number One of the most often asked questions is how much of 100 to wind up with a safe percentage of stocks versus a portfolio should consist of stocks. It’s a good question, other investments. For example, 30-year-olds will often and one that doesn’t always have a clear-cut answer. do well by allotting 70% of their portfolios to stocks, The amount of stocks you should have in your portfolio while 60-year-olds may want to reduce this percentage will vary depending upon a number of different factors, to 40%. including your age, current net worth, and penchant for Of course, age is just one factor that influences port- taking risks. Still, there are a few basic rules of thumb folio allocations, and there are more aspects that need to that are worth adhering to, which should make fleshing be taken into consideration. The best way to ensure out your portfolio less stressful. your portfolio is properly divided is to work with a fi- If you’re saving for retirement, most financial plan- nancial planner who is fully aware of your situation and ners will recommend that the younger you are, the more can make educated suggestions. After all, a formula can of your portfolio should be allocated to stocks. Stocks only get you so far, and personal recommendations will are a relatively risky and volatile form of investment. always be more valuable than guesswork. When we’re young, taking risks tends to come along FR2019-0522-0102 with less catastrophic consequences than when we’re