Learning from 2014 for a Better Future

As one year ends and a new one begins, reflecting and learning from the past can help to create a better future.

For your investments and financial planning, many principles hold true year and after year. While financial markets are continuously changing and throwing “unexpected” surprises at us, adhering to a set of financial principles can provide calm in an otherwise volatile world.

The past year again taught us it is best to focus on what we can control.

Most financial market forecasts are not likely to be accurate or reliable, so don’t rely on them.

    • As 2014 began, most economic forecasters were confident that interest rates would rise. The opposite occurred, as the yield on the 10-year US Treasury notes significantly declined from 3.03% to 2.19%.*
        • We are convinced that you are better off with our long-standing fixed income strategy of structuring a ladder of bond maturities over many years, rather than trying to “bet” on the future direction of interest rates.
    • We doubt anyone accurately predicted the major decline in oil prices which occurred in 2014, which has continued into 2015. Oil has dropped from nearly $110 per barrel as of January, 2014 to $53.45 as of December 31, 2014. It has declined even further to around $46 per barrel as of 1/14/15.
          • There will be companies and geographic areas that will benefit from this oil price decline and others that will be hurt. Overall, we feel this will be a net positive for the global economy.
          • The price decline has been very quick. It is likely that oil and gas prices will increase at some point, as oil companies adjust their future investments and production and as overall demand increases. We cannot know the future movements of oil prices and the rate of either declines or increases.

Be resilient and positive.

    • The media tends to focus more on the negative and on short term issues and problems. Each year brings a new set of concerns and surprises. One of this year’s was Ebola. You are best to focus on the longer term and remember that companies have shown great abilities to be resilient and adapt to changes.
    • While many have expressed concern over various economic and policy issues, companies have continued to sell more, be more profitable and return more to shareholders. Of the 30 companies in the Dow Jones Industrial Average, 28 of them increased their dividends during 2014, with an average dividend increase of 11.65%.*
    • The S&P 500, which represents US large companies, is often stated to average 8-10% annual returns. However, in the past 89 years, it has never actually delivered a total return between 8-10% in a single calendar year. In fact, since 1926, there have been 28 years with gains or losses in excess of 25%. Investors should expect the unexpected every year.*

Discipline, diversification and rebalancing are very important.

    • Faced with ever changing financial markets, new technologies and wild swings in oil and commodity prices, our philosophy of broad global diversification is logical and time-tested.
    • We strongly feel you will have a greater opportunity for reaching your financial goals by adhering to this consistent strategy, by being disciplined, regularly rebalancing and having a portfolio tailored to your personal needs, as opposed to continuously trying to predict the next winning company, industry or country.

Each of the major concepts above is identical to the ones in our January 2014 client quarterly letter. We expect that these same principles will continue to apply in 2015, and many years thereafter.

Note:  This is an excerpt of the quarterly client letter that was mailed to our clients in January 2015, along with their quarterly reporting statements, which are easy to read and understand.

*Source: Weston Wellington, “Down to the Wire” column dated January 13, 2015, Dimensional Fund Advisors

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