Year End Review Q and A (and much more)

What were some of the biggest surprises or events of 2015?

  • The huge decline in oil and commodity prices.
    • The greater than 40% decline in oil and gasoline prices since January 1, 2015 shows how difficult it is to make financial predictions. I doubt anyone would have accurately predicted these price levels a year ago, let alone a few years ago.
  • The sharp decline of the stock market worldwide in late August, and then the subsequent recovery which recouped those losses by early November.
    • This re-iterates our strong belief in not trying to time the market and to remain fully invested in the stock allocation that is appropriate for you.
 Are there other implications or lessons to be learned from the huge drop in oil and gas prices?

Technological innovation is a major cause for the drop in oil prices, and thus gas prices. These innovations, which were not envisioned 10 years ago, have enabled oil to be found and produced at far lower costs and in more places. The drop in oil prices and the continued technological improvements throughout the energy sector is globally transformative and will generally have huge long term positive implications.

What do you think of the Federal Reserve action this week to increase short term interest rates?

As we discussed in our blog post 2 weeks ago, Interest rate liftoff and the impact on you, we view the Federal Reserve action to begin increasing short term interest rates as positive, as it reflects strength in the US economy.

We expect short term interest rates to increase very gradually over the next few years. As traders try to guess the timing of these Fed moves, this will likely cause short term volatility in the stock and bond markets. Remember, volatility is temporary and comes with investing in the stock market. It is not always enjoyable to live through, but just as this summer’s volatility came and went…so will future volatile periods.

What should investors be focusing on now?

Investors should remain focused on their long term goals, not on short term stock market returns or performance. You should view your portfolio performance over many years, not months. You should review if your strategy is working well, when actually tracked over 3-5 years, or longer, against appropriate benchmarks.

So how are the funds that you recommend performing?

The mutual funds we recommend are performing very well, as compared to their respective category benchmarks (for example, how does a US large value fund compare against other US large value funds?). In nearly every asset class, they are in the top quartile over the past 3, 5 and 10 years. Most of the funds are outperforming their category averages by a distinct amount annually, over the past 3-10 years.

What are some key trends or observations that you feel are important for the future?

  •  Investors should continue to focus on what they control. By this we mean their portfolio should be broadly diversified, they should utilize low cost investments and be mindful of tax minimization of their portfolio holdings.
  • Too many people focus on trying to pick the right stocks or “best” active mutual fund managers. This has been proven not to be a winning strategy, especially if you actually quantify your results and costs.
  • Others hold onto stocks which may have been good blue chip stocks many years ago, but have vastly underperformed the markets in the past 5-10 year ago. This is especially a key issue with people who have gone through life transitions and inherited stocks from parents or spouses, and are reluctant to make changes to these holdings.
  • With the rapid changes in technology and innovation, we feel our globally diversified strategy is even more important than in the past. For example, while we cannot identify which technology stock will be very successful over the long term (and don’t think others can consistently predict this in advance either), we will benefit from holding these stocks within our diversified portfolios.
  • As people are living longer, planning should emphasize your future cash flow needs, not just your portfolio balance.

What about bonds?

Investors should avoid “high yield” or “junk” bonds. We do not recommend these to our clients, as the increased risk is not worth the additional interest that you may receive. See the end of our blog post last week which discussed this topic, How do you define financial success?. If you own any of these types of bond mutual funds, please contact us to review your holdings.

Are you positive about the future?

Yes. Absolutely. One of the books that I have purchased, but not read yet is titled “The Rational Optomist.” That is how we would describe our feelings about the future. Our economy, government and the global society certainly have problems to address and overcome, but in the long run, society will continue to advance. Companies will continue to innovate and prosper. To invest successfully, you must remain positive about the long term and the ability for companies to progress and succeed.

What book has had the most impact on you in the past year?

The Moral Case for Fossil Fuels, by Matt Epstein. While I am only about halfway through this book, it is extremely thought provoking. I’m not sure that I agree with all of the author’s opinions, but he is challenging “conventional wisdom” with hard facts and concepts that I have not seen elsewhere.

Our objective is to provide you with the most successful investment and financial experience we can. We rely on academic data and continual learning, not crystal balls and unproven forecasts. We are not like a traditional “Merrill Lynch” stock broker.

Epstein’s provocative book has caused me to look at the energy issue with new perspective. In general, most people think we should have more alternative energy sources, beyond oil and coal. He vividly describes a scene in Gambia in 2006, where infants died because the hospital did not have reliable 24/7 electricity. He states that until alternative energy sources can be produced in tremendous mass, then stored or provided 24/7, people need to understand how integral fossil fuels are to the advancement of our society over the past 100 years.

Epstein defines his standard as the quality of human life. He states that fossil fuels have “enabled billions of people to live longer and more fulfilling lives” with very clear, distinct facts and examples.

For me, one of the key takeaways from this book is to challenge conventional wisdom and future forecasts when providing advice to our clients. We have to be prepared for the unexpected, and to help our clients cope in a world with many unknowns.

By relying on facts and data, continually learning and challenging ourselves with many opinions and sources, we will be better financial advisors. Our clients will be better because of that.

How and why do you write these blog posts?

Brad writes these blog posts each week. They are not outsourced or written by a non-member of our firm. Keith and Michelle review and edit them.

I write them to educate you, our clients, potential new clients or friends. I write them to help you better understand the financial world, our investment philosophy or to encourage or motivate you to take some action, to improve your life or your financial well-being.

Writing these essays helps me to be a better advisor. By writing almost every week throughout the past 18 months, I am forced to be much more aware of what is going on in the world and what may be relevant and important to communicate to you.

As we conclude 2015 and begin a new year, I hope that these weekly essays are as valuable to you as they are to me in writing them. I look forward to keeping you informed and help you cope with our constantly changing world, so you and your family can be more financially secure.

Note: This will be my last essay for 2015. I will not be writing an essay next Friday. I expect to send out the first blog post for 2016 on January 1. Have a happy holiday season and best wishes for a healthy and successful 2016.

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