Below are a few high level bullet points from the year that was followed by a reiteration of my steadfast beliefs/philosophies.

1. A year of global growth. The year 2017 was noteworthy to me in that for the first time this century, all the major economic bastions of the world were growing simultaneously, although at different rates. Before this year, Europe or Japan or Emerging Markets dealt with significant headwinds, and growth here at home was sluggish. I view this sort of synchronization of global growth as a somewhat underappreciated positive that looks to be continuing.

2. A generally great year for folks who own a diversified bunch of companies (aka equities, aka “the stock market”). With a total return of 21% for the S&P 500, and the deepest intra-year decline a mere three percent (versus the average, since 1980 of 14%), our philosophy of staying the course – despite the fear mongering of the financial media – was well rewarded in 2017. We are, as you know, long-term equity investors who know markets cannot be timed. We remain positive on the equity market for the long term. All of that said, I can’t imagine that the fluctuations in the markets will stay so muted in 2018.

3. The U.S. accelerates-and feels better about it. Steady hiring has driven the unemployment rate down to 4.1%, putting the economy on track for a potential third straight quarter of 3% growth-a breakout of sorts. The consumer, by all important measures (politics aside for some), is feeling better about things than he/she has since before the Great Recession, and retail sales are quite robust. Household net worth in the fourth quarter may have reached $100 trillion, and consumer balance sheets continue to be healthy. Business investment is accelerating at long last. These trends, too, are continuing as we enter the new year.

4. Hysteria about valuations remains overdone. Valuation isn’t a tool for timing the markets (nor is anything else), so as long-term investors, we tend to tune it out. That said, if you remember my earlier post this year (The Continued Myth of All-Time Highs), we don’t buy the idea that equities are importantly “overvalued.” Compared to yields on competing fixed income investments, equity valuations appear to us quite reasonable, a view shared on more than one occasion this year by Warren Buffett. I’m always happy to walk you through the math supporting this conclusion; never hesitate to ask.

5. Successful investing remains (and ALWAYS will remain) a Human Nature issue more than a financial one. The human brain will never be free of the two emotions, fear and greed. We have been fighting, these past nine years or so, a fight against a continued fear of equities, and I feel we have been successful in this battle with our clients, though the war is never won. As long as the overriding emotions of most investors remain somewhat fearful (and it is), we can feel good that we are not near a long term top in the market. It is when the pathology begins manifesting as greed (or euphoria) that we must begin to get concerned. And as a general rule, we are nowhere near this stage in equities – although it must be said that the cryptocurrency mania should remind us all that euphoric impulses are always lurking, looking for a place to break out. This is a siren song that I urge you all to tune out. Again, always happy to discuss.

A reiteration of who I am, what I believe and what I work hard to do for clients and instill in my clients:

1. Most of my clients – and I certainly include you in this generalization – are working on multi-decade and even multi-generational plans, for such noble goals as education, retirement, and legacy. Current events in the economy and the markets are in that sense distractions of one sort or another. For this reason, I make no attempt to create or infer an Investment Policy from today’s or tomorrow’s headlines, but rather I align client’s portfolios with their most cherished goals, which we know gives them the Greatest Probability of Success. I urge you to tune out these distractions as it relates to your financial life.

2. Going back to 1980, the average intra-year decline in the S&P 500 is around 14%. To rephrase, we average a top to bottom drop of 14% every year. Yet, despite this significant annual average drop, annual returns have been positive 29 out of the 38 years, and the Index has gone from 106 at the beginning of 1980 to 2,673 at year-end 2017. I believe the great lessons to be drawn from this data is simply that temporary market declines (even greatly significant ones) have been very different from permanent loss of capital, and that the most effective antidote to downward fluctuations is simply the passage of time. In other words, losing money in a globally diversified set of equities has always been a human phenomenon. People tend to make decisions that lead to permanent loss of capital, as the markets themselves continue on the inevitable march higher. Protecting you from this human impulse is one of my most important functions. I will be there when (not if) the impulse returns.

3. My essential principles of portfolio management in pursuit of my clients’ most important goals remain fourfold:
a. The performance of a portfolio relative to a benchmark is largely irrelevant to financial success. In other words, beating some indexed benchmark isn’t a financial goal, nor does it ensure one of financial success.
b. The only benchmark we should care about is the one that indicates whether you are on track to accomplish what’s most important to you.
c. Therefore, risk shouldn’t be measured by short term fluctuations of your account but as the probability that you won’t achieve your financial goals. And,
d. Investing should have the exclusive objective of minimizing that risk to the greatest extent practicable.
This is what I continue to work to provide you, please let me know if you’d like to discuss this further.

4. Finally, the nature of successful investing, as I see it, is the practice of rationality under uncertainty. We will never have all the information we want, in terms of what’s going to happen because we invest in and for an essentially unknowable future. Therefore we practice the principles of long-term investing that have worked best over the decades: A) Planning; B) a rational optimism based on history and experience (in other words, faith in the future); C) patience in your plan; and D) discipline in your investing. These will continue to be the fundamental building blocks of my investment advice in 2018 and beyond.

I hope you had a wonderful holiday season, and I wish for you nothing but health and joy and peace in 2018.

We have clients nationwide; if you know someone we may be able to help with their financial planning and wealth management, we would be happy to discuss it.


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