How are you feeling about your stock investments?
- Are you pleased with the gains in your portfolio?
- Are you surprised by the market increases, given the slow but steady economy and political turmoil throughout the world?
- Are you worried about the future for US markets, as many indices are at all-time record high levels?
Pleased: If you are a client of our firm, you should be pleased with the performance of your globally diversified stock portfolio. It is important to emphasize that we are firm believers in diversification, as diversification has many long-term benefits. Diversification is always working, which means that sometimes it helps you and sometimes it does not. For example, being globally diversified has been a significant positive in 2017, as International and Emerging Markets are outperforming US stock markets. At the same time, a large portion of the gains of US stock indices are attributable to a handful of US large companies, primarily in technology. For example, Boeing alone accounted for 1/2 of the July increase in the DJIA.
Surprised: You may be surprised by the gains of stocks since early 2016, and particularly this year’s gains. Even after the post-election increase in stocks in late 2016, which was attributed to the pro-business agenda of the Trump administration, stocks have continued to gain in 2017, despite the lack of progress in Washington.
We feel the 2017 gains are warranted as stock growth is generally correlated to earnings and the future expectations of earnings. As companies have reported earnings in 2017, they generally have been far more positive than negative.
This is also another benefit of our adherence to remaining invested in stocks for the long-term and not trying to time the stock market. You never know when stocks will increase, but statistically since 1946, stocks (as defined by the US S&P 500) have risen in 50 of the past 71 years. You are rewarded for your patience and resilience, even when you don’t expect it.
Worried: While stocks have increased significantly in recent years, there has not been a correction of US stocks (decrease of greater than 10%) since early 2016. There can always be reasons for concern and now is no different. Washington has been ineffective in passing health care reform and more important to the financial markets, there has been no real progress on corporate or individual tax reform. There are always global issues to be worried about and unexpected events can occur at anytime.
However, let’s go back to some of our basic principles. We believe in broad, global diversification. Global stock valuations are much lower than US stock valuations per many metrics, so global diversification continues to make sense.
Even if you are worried about certain issues or are concerned about when the next “correction” will occur, what can you do about it? We do not know when a correction will occur. No one can accurately predict this. And when a correction does occur (and they will occur), no one can accurately predict the bottom. You can’t with any consistency accurately predict when to get out of the market before a correction and when to get back into the market before the next recovery. Thus, it is best to stay in stocks for the long-term.
Our way to handle your worry and concerns about stock volatility is to handle it in advance. We work with you to set the stock allocation of your portfolio at a percentage that feels comfortable and reasonable based on your specific financial situation, goals, needs and tolerance for risk (the stomach test).
How do you feel now? We hope that you are pleased and surprised by the advances in stocks and your portfolio, but not worried.
If you are worried, give us a call, so we can talk about it.