Financial Lessons from 2017

As 2017 draws to a close, there are many financial and investing lessons to be learned.

It pays to be disciplined and remain invested. Few market analysts would have predicted the significant gains of the past two years of the broad US and International stock markets. Investors who stayed the course have been rewarded. Market timing does not work and will not work in the future.

Do not mix your political views with your investment policy or decisions. Whether you are a Republican, Democrat or Independent, allowing your political views or concerns to influence your investment decisions would have been detrimental to your financial health. The US stock market as defined broadly by the S&P 500 has done very well over the past 10 years, during both Democratic and Republican presidents. Yes, some political changes can impact the US stock market, but in the long term, corporate earnings and future earnings expectations drive stock prices, not politics.

Being broadly diversified, including internationally, is to your benefit. Both in the long term and short term, holding a significant allocation to stocks outside of the US, in the form of International and Emerging Market mutual funds, has been beneficial to our clients. While the US stock market has performed well in 2017, broad international and emerging market funds have done even better than US asset classes in 2017. As we discussed in our blog post “Benefits of Global Diversification,” dated April 13, 2017, a globally diversified portfolio far outperforms a US based large company portfolio in the long term. This year shows why this is valid.

Don’t get complacent with the lack of volatility. This year was historic not for its gains, but for the lack of volatility. This was a year without any major downturns and no broad market declines of 10-20%. While the economy may continue to do well, you should always be prepared for a temporary decline in stocks of 10-20% during any year.

It is hard to predict the future. It is hard to pick individual stocks and long-term trends.We are convinced and academic data proves that owning low cost asset class mutual funds is more effective than trying to pick stocks or hire a mutual fund manager who thinks they can outperform the markets over the long term. Another benefit of owning the broad asset class funds we recommend is that clients benefit from economic trends and changes, which may be hard to identify in advance. For example, investors who were heavily weighted in energy stocks a few years ago may continue to receive dividends or distributions from their investments, but the stocks or partnerships have significantly underperformed market averages. The energy bet may produce income, but a more diversified portfolio would be way ahead in terms of total capital. This same logic could apply to other sectors at different time periods.

Password and internet security is still important. We continue to stress that you remain vigilant regarding using strong passwords, changing your passwords a few times a year for key websites and not using the same passwords at multiple websites. We recommend using a password manager program, such as 1Password or other similar apps. These can be used on your cell phones, laptops, desktops, iPad or almost any other similar device. They will save you time, as well as provide you with greater security. Try it. You’ll like it! You should also be aware of phishing emails and check your credit card activity and statements regularly for unauthorized charges. Internet fraud is increasing.

Be prepared for disasters. Check your homeowner’s insurance coverage. Unfortunately, this year saw many hurricane and wild fire related disasters and many homes were destroyed. It is important for everyone to review their homeowner’s coverage, to make sure the value of their coverage is adequate for today’s replacement value. This is especially important if you live in an area that is prone to these types of disasters, such as Florida and California. Based on discussions with people who live in areas affected by the California wildfires, those with more expensive homeowner’s insurance providers expressed that it was well worth the additional premiums. The general feeling is that you get what you pay for. In this case, the extra costs will result in much better coverage and benefits. Make sure your computer records are backed up regularly and do some disaster planning in advance. I will write a more detailed post on this topic in the future.

We are truly thankful to our many clients and readers of this blog. We wish all of you a Happy Holiday Season! We wish each of you good health and happiness in 2018.

Writing this blog is work, which I feel is very worthwhile and effort well spent. There are not many advisors of firm’s of our size who write in this manner. We feel this is a vital method of communication to our clients, as well as learning, education and discipline for me. We hope that you are a better investor and person as a result of these weekly blog posts. This is the 50th post of 2017 and I will likely write #51 for next Friday. Thanks for reading!

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