10 Things You Should Know

  • Economic forecasts and stock market movements are often not the same. Even though most people think the US economy is stronger than Europe’s, International stock markets are doing better than US stock markets so far in 2017.
  • Expect the unexpected. Conventional wisdom frequently is wrong.
    • It does not look like corporate or individual tax reform is going to get completed in the coming months. There are no real proposals on the table. The initial goal of Labor Day looks unlikely. Will this get done by year end?
  • To be a successful investor over the long-term, it helps to have a clear and consistent investment philosophy. This is why we develop written investment policy statements for all of our clients.
  • Interest rates are very hard to predict. Short term rates have increased. Longer term rates have gone down, despite nearly all forecasters predicting the opposite at the beginning of 2017. This is why we don’t make interest rate bets with your fixed income investments.
  • The price of oil continues to fluctuate around $50-55 per barrel. There was a large price decline this week, as US shale oil production continues to increase. Output is expected to rise by 124,000 barrels a day in the US during May. Rig count has risen 13 weeks in a row and is at a 2 year high.
    • US production puts a cap on oil and gasoline prices, which is good for US consumers and companies that use oil to produce goods. Not so good for oil and related companies.
  • Uncertainty is the only certainty. By investing in broad based index-like funds which we recommend, you are better able to handle uncertainty.
  • The following statistics are startling and provide further confidence in our stock investing philosophy of using globally diversified asset class funds, which track various benchmarks:
    • In a just released SPIVA US Scorecard** report, during the 5 years ending December 31, 2016, 88% of large-cap managers, 90% of mid-cap managers and 97% of small-cap managers underperformed their respective benchmarks.
    • During the 15 years ending December 31, 2016, the same report showed 92% of large-cap managers, 95% of mid-cap managers and 93% of small-cap managers underperformed their respective benchmarks.
    • If you are not a client, do you know if your fund managers or your individual stock portfolio are underperforming or out-performing their respective benchmark?
  • Some investors hold individual stocks long-term because they value the high dividends the companies pay. However, the dividends can come at a huge opportunity cost, if the underlying stocks vastly underperform major benchmarks over the long term. Investors in IBM, Verizon, American Express, Coke, many utilities, and energy related stocks and limited partnerships would have been far better off financially with broader investments, even though they would have received less in dividends.
    • For example, these companies have dramatically underperformed the S&P 500 over the past 5 years: IBM (15%) per year, Verizon (4.2%) per year, American Express (6.6%) per year, Coke (7.6%) per year and Enterprise Products Partners, a major oil and gas infrastructure firm (7.5% per year).
  • Sometimes stock market valuations do not make sense. Tesla produces a tiny fraction of the cars made by Ford or GM, yet Tesla’s stock market capitalization is more than each company. Tesla’s Gigafactory being built in Nevada will be the world’s biggest building, with over 5.5 million square feet, or approximately 100 football fields. We won’t know for many years whether Tesla will be successful or not, or the future direction of its stock. By being broadly diversified, you can benefit from its success or not be dramatically hurt if the stock does poorly.
    • One of the benefits of our investment strategy is broad diversification and not having to make individual stock decisions like this. Around 1999-2000, when Amazon was taking off, I never thought its stock price made sense. It always seemed highly overvalued. However, through the phenomenal growth of its Amazon Web Services and online sales, it became profitable and investors have benefited.
  • The long-term historical perspective which we provide as advisors can help you to be more financially successful. It is how you can be rational in the face of uncertainty and deal with the onslaught of news events and the rapidly changing world.
    • Perspective, planning, discussions and comprehensive advice on topics such as investments, tax management, charitable giving and estate planning all provide you with peace of mind and security.
**Source: Spiva US Scorecard Year-End 2016, produced by S&P Dow Jones Indices.
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