Our job is an interesting one in many ways. One of the things that we discuss regularly is the tone of calls that we are getting from clients. Are clients collectively nervous and risk averse, or are they feeling optimistic and willing to stretch their risk profile in order to potentially capture greater returns? We cannot recall a time when we have had less consensus amongst clients on where the market and the economy are likely headed. A steadily improving economy and corporate earnings cycle is offset by ever present geo-political risks. What is an investor to do?
Focus on the process
Having been in this business for a combined nearly 50 years, long ago we gave up our crystal balls and realized our best guess for what was coming next was not any better than any of the so-called experts. Instead, we pay extremely close attention to the technical indicators (moving averages) that tell us what is actually happening. We don’t worry excessively about why a particular asset class is behaving the way that it is, instead we focus on what trends are developing and how those trends fit into long term portfolio construction.
It is virtually impossible to successfully trade based on “events”. Whether the Presidential Election, North Korea or policy in Washington D.C. is the latest event, trading how the market will respond is, at best, a guess. What we can do is pay attention to what the longer-term themes are that may drive the market for several quarters, or even years, as opposed to a few days or weeks.
The attached article by Richard Bernstein points to fundamental reasons why the market has been performing well. One of the points we have been making to clients is that the timing of the election happened to be coincidental with a steadily improving economy and, thus, the “excuse” for the rally was the election when the actual reason was the economy and earnings. Bernstein points out that the corporate profit cycle actually bottomed in early 2016 and we are just now starting to see the pop in earnings growth. He believes we are likely to see strong earnings growth year over year, which will help bring down the relative valuations of stocks.
Control what you can
There are so many things that we don’t have control over that impact investment returns. It is a waste of time, in our opinion, to get overly concerned about these things. Instead, we can better serve clients by focusing on the things we can control: expenses, taxes, and diversification.
Last week, for example, S&P Dow Jones published their annual Scorecard comparing the results of actively managed mutual funds against their respective benchmarks. The results are incredible – over 90% of the active managers fail to achieve their objective of beating their benchmark over a 15-year period! Given this set of facts, we can’t see why we would select an actively managed fund that charges on average 0.70% for internal fees and expenses, when we could choose an index fund that charges 0.07%.
Spring and Summer “to-do” items
Now that we are through tax season, we would encourage you to think about taking advantage of some of our complimentary services. We have several Financial Planning programs we can provide for clients, which range from the big picture of whether a client will have enough money to retire, to very granular plans where tremendous detail is provided on all aspects of a person’s financial life. We can also do some really neat planning that helps with estate issues and taxation.
We would also encourage you to set up Vault with us. Vault is our version of an encrypted cloud based information storage system that is secure and easily accessible. Clients can use Vault how they choose, but most tend to use it to keep track of their estate planning documents, taxes & financial records and important family contacts such as their attorneys, CPA and physicians.
Thank you
In closing, we can’t express enough how appreciative we are of our relationship with our clients. It’s a pretty rare thing for someone to have a job they love going to each day and getting to help friends in a meaningful way improve on the quality of their financial life for their family.
Warmest regards,
Brett, Steve & Becky
