*** We believe communicating with our clients is of utmost importance, especially during turbulent times in the market. While we don’t claim to have a crystal ball on the future of any financial market at a given point in time, we do believe that keeping clients informed on why things are happening increases their comfort level and understanding. This post contains a message initially sent to clients just after the start of Q2 2012 as part of that communication effort***
Let’s take a look at a few things that occurred / conditions that existed during Q1:
· One of the biggest fears of the financial markets over the past year was fulfilled as Greece defaulted on some of its government debt, triggering Credit Default Swaps associated that debt.
· Gasoline prices hit $4.00 per gallon in many parts of the country (well north of $4.00 in some parts).
· Tensions in the middle east, especially between Iran & Israel and Iran and most of the rest of the world escalated to threats of war and the imposition of extreme economic sanctions
· The US National Debt topped $15 trillion dollars for the first time ever, now exceeding US GDP, and would take $50,000 per citizen to pay it off. The Federal government is also spending $1.50 for every $1 in tax it collects so that debt is still increasing very rapidly.
· The unemployment rate closed the quarter at 8.2% (~1 in 12 people country wide out of work who are looking for it) and the underemployment rate closed at 17.8% (more than 1 in 6 people out of work and looking, out of work and gave up, or working reduced hours due to economic conditions).
· A handful of major banks failed the latest Federal Reserve stress test. Another 15 smaller U.S. banks failed completely and were closed by the FDIC.
· Median home prices fell to new lows (surpassing the 2009 lows) and the Case-Shiller home price index now has average home prices nationwide a full one-third lower than they were 5 years ago.
I point all this out because despite all the bad news, Q1 2012 was a fantastic quarter for risk-based asset classes. In fact, for the S&P 500, it was the best calendar quarter since 1998. That doesn’t seem to make much sense though, does it? Since the lows in March of 2009, when it looked like we were on the brink of the Great Depression v2.0, the stock market has returned ~120%. 120% over three of the worst economic years we’ve seen in a century. Well, it does make sense if you realize that the short-term whims of the stock market don’t synchronize themselves perfectly with the long-term movements and trends of the overall economy. You simply can’t win by selling stocks when times are bad and buying them when times are good. People keep trying it, but they keep buying high and selling low and losing money in the process. The stock market priced in the years of bad news to come, and priced it in way worse than what has actually happened, all the way back in 2008/2009. That means that even a terrible economy still turned out better than what markets were expecting and therefore, prices had to move up accordingly. Of course there was no way to know that we were at the bottom when we were at the bottom or that economic conditions ultimately would be less terrible than the market was forecasting. This is why I continue to coach clients to focus not on “winning” the stock market game and trying to outperform an arbitrary benchmark, but instead to focus on achieving their own financial goals. Instead of predicting the short-term future, we can spend the time matching a portfolio to the needs of the client. Need $100k for a house downpayment in 2 years and have $95k today? We make sure most of that money is not in the stock market. There are short and medium term bonds that offer less reward potential, but substantially less risk. It’s better to miss out on a big up move and still be able to buy your house than to gamble it and maybe wind up with 150k or maybe only 50k. Need $4M for retirement in 30 years and have $100k today? We make sure most of that money is in the stock market. You really need the growth over the long-term and if you lose 50% of that $100k over the short term, it means you get to accumulate the other $3,950,000 starting from a lower level, likely with higher returns for the future as a result (see 2008/2009).
The moral of the story is that there are only two predictions that I’m confident in and that you should be confident in as well. First, the stock market will continue to be unpredictable (that’s right, predictably unpredictable) over the short-term and will almost certainly have ups and downs. Second, if you have a well-thought-out plan, incorporate flexibility to react to those things that don’t go according to plan, and actually take the time to react when the plan needs an adjustment, you will achieve your goals.
As you look through your account statements this quarter, try to keep both predictions in mind. If you saw large gains in Q1, you have an aggressive portfolio (very dependent on the stock market). Can you handle even bigger losses in a quarter to come? If yes, hang on and enjoy the ride. If not, please contact me. If you didn’t see huge gains in Q1, you have a more conservative portfolio (less dependent on the stock market). Are you still moving toward achieving your goals? If yes, try not to be jealous of your neighbor who has all his money in a leveraged stock fund and made 50% in Q1 because you don’t need that kind of risk to achieve your goals. If not, please contact me.
As always, if you have any questions, comments, or just want to chat, please feel free to send me an email or give me a call. For those of you who use Skype, I’ve even started to incorporate video chat and screen sharing where it makes sense. Technology keeps making the world seem smaller, but time seems to be moving faster than ever. As much as I can’t wait for the end of tax and allergy season (no better time to be trapped in my office for two months of the year), I can’t believe it’s already mid-April. Enjoy the great weather while we have it!