“Your Vision, Our Expertise: Your Peace of Mind” ®


Market Commentary 12/31/2017

Time to question the rise?

In February of 1984 the legendary investor, Sir John Templeton said “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” As markets have risen to all-time highs in 2017, what is expected in 2018.  Many economists, investment strategists and portfolio managers see 2018 as a year where global growth continues to be strong.

This is echoed by the Executive Summary of experts in Schwab’s 2018 Market Outlook as follows:

  • Global economic growth lifting earnings is likely to be a key driver for both U.S. and international stocks in 2018.
  • Falling correlations across global stock markets bolster the case for diversification.
  • We expect inflation to rise due to a tight labor market and accelerating wage growth.
  • The Federal Reserve is poised to raise rate two or three times in 2018.
  • 2018 could be the year the 10-year Treasury bond yields exceed the three-year high of 2.6%

Jeffrey Kleintop, Senior Vice President, Chief Global Investment Strategist at Charles Schwab, states that global economic growth is the broadest in a decade. According to Kleintop, every one of the world’s 45 major economies tracked by the Organization for Economic Cooperation and Development(OECD) grew in 2017. This trend is expected to continue to grow in 2018.

Although 2017 will be remembered as a year of records broken, investors in 2018 may need to consider a portfolio check-up. Could we be in the late stage of this bull market that continues to present us with opportunities or is it a dilemma?   Investors in general are beginning to ask that question of when does the market decline.  If you have been there before you know the feeling of uncertainty and if you are new to investing you may not understand the risk exposure you have.

One of the best teachers of all-time on investing was Benjamin Graham. In his book “The Intelligent Investor, Revised Edition”, he said “The best way to measure your investing success in not by whether you’re beating the market but whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

Knowing your Recovery Time is Peace of Mind

Asset allocation shows how much exposure your portfolio has relative to volatility. It’s not your age that matters; it’s the recovery time you build into your portfolio allowing you to have the ability to weather the downturn in the market.  Look at investors that jumped out in the last down turn that bottomed on March 9, 2009 that are still out.  The fear of losing it all was greater than the sense of staying the course.  Investors were driven by fear thinking that they were preserving the remaining value of their portfolio.  The emotional so called “chicken little syndrome” of the sky is falling weighed heavier than logic in 2009. Although in the investors mind they thought they preserved assets, but instead they locked in losses.  In some cases, they have never returned to invest in the markets.  To be a long-term investor, you must understand the underlying risks that you are willing to take on.  Under what circumstances would you make a change in the way you are invested.  Is it a number that it drops to, an influential source that changes your thinking that it is Armageddon or simply you begin to believe it will never recover?  These thoughts may seem sound while the market is in a downturn, but ultimately the emotional part of the brain has taken over.  However, that is where our philosophy has benefited our clients over the past 36 years and we believe that is true going forward.

Why did so many of our investors stay the course during the Financial Crisis?

It wasn’t because they weren’t concerned or worried as the markets tumbled. We believed they stayed because they understood diversification and their risk exposure.  It is important to review asset allocation often during up markets.  Watching your portfolio go up and back down again isn’t taking advantage of rebalancing the portfolio from time to time.  The best time to rebalance a portfolio is when you are ahead not after it has gone down.  We believe that risk is a measurement of time and lifestyle needs.  If you look back at the major stock market declines of 1973-74, 2000-2002 and 2007-2009 you will begin to see a pattern.  Portfolio values during each of these time periods from the top of the market to the bottom and back up to the previous top shows us approximately a six-year cycle.  Therefore, if you know your monthly need from your portfolio, then you know how much safety you can build into your portfolio for the worst of times.  Matching your monthly needs to how long you can wait for recovery from peak to valley to peak is key to developing a well-diversified portfolio.

Today we all know that markets have propelled ahead to record levels. The news on the street is how much higher can this market go.  Our experiences over the years tell us it doesn’t matter how much higher if you have your portfolio positioned to move through all kinds of markets.  In 1981, when I enter this profession the Dow was at 875 and today it has pierced through 25,000.  Looking back, it is just a number, since the companies that made up the Dow then are different today.  It is more about what companies themselves are doing with regards to performance, then an index of stocks that has ever changing names.

What investors should be doing today is taking profits, paying attention to their asset allocation and understanding their ongoing needs from their portfolio.   As markets continue to move higher investors should also consider selling profits inside their taxable accounts.  Figure out what your after-tax return is overall not the extra dollars that you pay in taxes due to the long-term capital gains. The market is not selective when it goes down.  It takes the profits in your taxable accounts if you don’t. Don’t ignore these high markets.  The times have been good for all of us as investors over these past ten years.  When farmers have bumper crops, they put hay in the barn.  As investor’s it’s okay to take taxable profits to provide for your future cash flow needs or have cash for opportunities after the market declines. As an investor don’t be afraid to pay taxes on your gains, it certainly better than waiting for your gain to be a loss.  In 2017, we took profits in all our retirement accounts, it’s prudent to consider taking some in the taxable accounts given the run up in the markets.

As investor’s we should all have our portfolio plan firmly in place whether the market goes higher or lower. It is easy to allow your psychological part of your brain to cast doubt. It is also easy for the various media outlets to create doubt or fear in the minds of investors.  It’s hard to ignore the noise. Don’t change your asset allocation to be more aggressive based on how the market is doing.  Instead base your allocation on need and recovery time.  You will be happier, less worried and a successful long-term investor.

We welcome your thoughts in the coming year. If you have concerns as this market advances, give us a call so we can talk through your situation.  We are grateful that you have believe in the philosophy of diversification over time.  Thank you for trusting in our approach.

Thomas L. Menzel, CFP®                                            
President/Principal Owner  
 Sources: 2018 Schwab Market Outlook, The Intelligent Investor, Revised Edition updated with new commentary by Jason Zweig, page 220, Franklin Templeton Distributors, Inc.

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