Unless you happen to be Rip Van Winkle, you know how historic the rise in stock prices has been since 2009, and in particular since November of 2016. And then, on the heels of tremendous economic news, everything changed in 2018. Volatility returned, and investors became nervous. And so, the question — What should I do NOW?
Since the mortgage/financial disaster of 2008 many investors have said, “I do not want to live through that again” and have avoided stocks. In 2013 and beyond many investors decided “we have recovered from 2008 and we are securing our gains.” Then in 2016 the narrative was “Donald/Hillary could win/lose and the market will go down.” Now, the sentiment for many is “this Trump euphoria will end badly.” These beliefs help to explain why $1.0 trillion left the market since 2012 even as stocks moved higher. Those who ran from the markets missed the exceptional results that have occurred since 2009!
The key question, however, is what does all of this mean for your portfolio now? If one were to ask 10 economist/market prognosticators to predict the direction of the market, you would likely receive 10 different opinions. Interestingly, the financial media is now producing commentators who readily admit that they are getting mixed market signals and so 10 different opinions may make sense. Although all have different opinions, the commentators rarely identify the timeframe over which they are making their predictions. Most provide an estimate for the next 3 to 12 months. If those same prognosticators were asked for their 15-year predictions their responses would be much more similar. 10 year predictions would still be close with a few outliers. 5 year predictions? Not as close, but we suspect still mostly positive. Since none of these prognosticators have a crystal ball, one would think that it would be easier to predict a short-term phenomenon rather than a longer-term outcome. This is incorrect. All of these prognosticators believe, as does PWA Wealth Management, that the financial/economic system that has driven the growth of this country, and now the world, is not going to radically change over an extended period of time. This belief is supported by history: the stock market has never experienced a negative 15-year period; 95% of the 10-year periods have been positive; 80 % of the 5-year periods have been positive; and approximately 60% of the one-year periods have been positive. With that data in mind, the further out prognosticators look, the more they tend to agree.
In the long run, markets continue to be driven largely by corporate profits. Between 2008 and 2015 most of the international news was negative given the state of Greece, Italy, Spain, Brazil and other struggling nations. Those problems still exist, but have been relegated to the background while the rest of the global economy has been growing dramatically. The relative peace in the world has also induced emerging market companies to rally. U.S. corporations benefit greatly from this international growth and U.S. GDP has been steadily improving. This coordinated global growth has led to a substantial rise in corporate profits. Could a geo-political event upset the global economic apple cart? Certainly, but we are now in an arena in which virtually all world leaders are focused on economic growth and enhancing the standards of living in their respective nations. Wars, including trade wars, are disruptive to economics and not in the best interest of the world’s dominant nations. As we look forward we see that U.S. and international corporations continue to have more than sufficient earnings power to justify the price level of the markets. When one factors in the growth potential, the markets remain on a long-term upward path. The recent tax benefits that U.S. corporations have been granted simply adds another log to fuel this fire of growth.
Given all of this, what is PWA Wealth Management’s market approach? We believe in long-term returns and are not driven by the emotions of short-term phenomenon. Although we focus on the long-term, we recognize that our clients have short-term needs and goals. We understand our investor clients’ short- and long- term needs and build goal oriented, outcomes driven portfolios. Even if there is no stated need for capital distributions, we recognize that unexpected events occur and attempt to anticipate those needs through holding fixed income investments and cash.
In addition to allocating portfolios for client needs, rarely do we find that the marginal return which occurs when investors overweight their portfolios with 10% or 15% additional stock exposure is worth the extra volatility. Of course everything is dependent on each unique set of facts. A 35-year-old who received a windfall and wants to stash this money away for retirement in 30 years might indeed be 100% in stock with that money. The current allocation decision always depends on the facts of the larger picture. What if the hypothetical 35-year-old has little other capital? What if they are in a job without a lot of security? These factors would certainly influence their allocation to include less stocks. Similarly, someone who just retired and needs $10,000 per month from the portfolio, but just inherited $10 million, could certainly choose to be close to fully invested in the market, but will rarely make that choice. Every investor is unique and has a very specific fact pattern and set of desired outcomes which yields a unique portfolio allocation.
Our job is to assist our clients in getting across the goal line of life — to help them achieve the unique goals they have set for themselves and their family. As fiduciaries, we align our management objectives with the goals of our clients. We would not build a portfolio designed to maximize returns at the risk of jeopardizing the accomplishment of our client’s goals. In addition, it is our job to educate clients about the markets with the goal of limiting those emotional fear and greed moments (which are natural), so that our clients enjoy the positive benefits of the equity markets while continuing to meet their shorter-term objectives.
And so: What should you do now? Remain focused on your goal line. We are!