Investing and weather: Dealing with volatility

The weather changes. The stock market changes. Both can be volatile. We want you to be comfortable with investing volatility.

On April 14th in Michigan it was 70 degrees and sunny during the day. That evening, the temperature declined to below 30 degrees. Overnight, it snowed 3 inches.

What happened?  The weather was very volatile.

For some people, this change in weather was not a big deal. They realize that these things happen in the Midwest every few years. It was unexpected but occurs. They knew the snow would melt within a few days and spring would resume. Even after what many consider the worst winter in history, spring will still arrive. It always does.

Some people may have been surprised by this change in weather, as they did not anticipate it. Others may have been more prepared, as they got better information from a weather forecast which turned out to be accurate. Even with the better information, it would be difficult to avoid the cold and snow. This would require a quick change in plans and expensive last minute travel costs.

So how does this relate to your investments?

The weather changing is comparable to volatility in the stock market. The stock market fluctuates. It can go up. It can go down. Up and down are both considered volatility, though most people don’t mind investing with upward volatility.

The weather and stock market are generally unpredictable, especially in the short term. It is hard to accurately predict what the weather will be next week. It is also difficult to predict what the stock market will do next week. With an advisor’s assistance, you can learn to become comfortable with the volatility of the stock market and investing.

Let’s change the focus from volatility to risk. Would you bet $1 million on the weather? We know it will (usually) be warmer in July than in May. But we can’t be positive. We assume it will be colder in February than in December. But would you actually make that bet? It would be risky.

We are confident that investing in a highly diversified global portfolio of stocks will perform well over the long term, as defined over many years. We don’t know what will happen to your portfolio tomorrow or next month. As your time perspective gets longer, the risk goes down. We know that being patient and sticking to a well developed investment plan that we have structured since 2008-9 has paid off.

Investing in the stock market means dealing with volatility. You have to live with the ups and downs and the uncertainty. The benefit is the opportunity of greater rewards, which increase with a longer time perspective.

If you study the financial history investing in the stock market (which we have done and continue to do on our clients’ behalf), we know that declines are always temporary. The stock market has always recovered from temporary declines to reach new highs.

It is our goal to provide you and your family with excellent financial advice. We provide our clients with the comfort and security to handle the volatility of the stock market, so you can benefit from these long term gains.  We want you to sleep well at night. Even during a thunderstorm!

Note:   This is an revised version of the quarterly client letter that was mailed to our clients in April 2014, along with their easy to read and understand quarterly statements.

Building Legacies

His last column began “Legacies are supposed to be easy to pin down.”   He was considering the legacy of the Michigan basketball team, following their last second Elite Eight loss to Kentucky.

The column concluded that the legacy of this Michigan team should not be defined by this isolated season alone, but by the “cementing of the program.”  They are a much stronger program than they were 2-4 years ago. They have reached a level of expected success.

This was from my son Daniel’s column in the Michigan Daily, the University of Michigan’s student newspaper. It will likely be his last column, as he graduates in May. With pride, I know the legacy that he and his fellow student journalists have left for future students at the Daily.

Usually, legacies are not built quickly. They take time. Legacies accumulate through actions. Legacies, newspapers and firms grow through decisions, big and small. Legacies are built by taking risks and listening to the advice of others. Legacies are built after hard work and preparation, most of which are not seen by others.

When Daniel started at the University of Michigan four years ago, he didn’t know he would write for the Daily. He did not expect to experience and write about a Final Four, two Sweet Sixteens, travel all over the US, Hawaii and Puerto Rico, as well as cover a NCAA wrestling championship. He created a legacy of his own. As he did this, he benefited from the legacy and loyalty of those Daily student journalists who came before him. They built an incredible institutional standard of excellence, camaraderie, devotion and yes, fun.

In our wealth management firm, the concept of legacy is important. We have had many discussions with clients about legacy, usually in the form of estate planning discussions and how they want their wealth transferred to the next generation and to charities. We value these discussions. Our clients value our contribution to this process. We appreciate that our clients trust us and realize the value we provide to them by involving us in this process.

As a firm, we are grateful for the guidance and trust of those who have mentored us, provided us with advice and helped us to form our investment philosophy.  We continue to build our legacy through our actions, advice and relationships we develop with our clients.  Like a basketball team or investments, our legacy is not defined over the short term.  Our legacy is earned over the longer term.