Many of the year end stock market reviews you may have read this month followed a typical pattern, highlighting dazzling performance of the equity markets, setting arbitrary forecasts and sector bets for 2018, and positioning portfolios for the “Five Stocks That Can’t Miss.” We believe all of this focuses your attention on all the wrong metrics, setting you up to inevitably fall short and possibly damage your long term plan.
The summary for 2017 is simple. Every major asset class was positive last year. That makes two years in a row when every asset class has been positive. This is one of the most obvious bull markets of the last
Even though the major asset classes were all positive in 2017, value tilting sectors lagged the overall US market. For many portfolios, our allocation to energy and real estate dampened returns in 2017.
Most of our clients will ask us about valuations, or if we are at a top in the market. With hubris we admit that we don’t know what the new year will bring and will focus instead on the durability of your portfolio.
Our belief is that long term wealth is created and preserved by owning companies that grow earnings. We select companies that have positive free cash flow, actually selling a product or service at a profit and
using the cash to either invest in growth or pay to shareholders in the form of interest or dividends.
According to LPL Research, 2017 was the first year since 2010 where the S&P 500 Index, global
developed countries and emerging markets all had positive earnings growth. Expectations are for that growth to continue in 2018.
What does all this information mean to you? In reality – not much. The overall economic environment and the arbitrary returns of any stock market index has very little to do with your ability to live a life of significance. Unless your desired outcomes have changed, we plan on maintaining your asset allocation strategy as we move into 2018, with perhaps some rebalancing.
Why don’t we sell energy and real estate and rotate into technology? It is helpful to remember that 2017 market returns were above average (by about triple) and unlikely to represent an average annual return going forward. Strategic asset allocation is a powerful risk management tool when building a portfolio, and in order for it to work, not everything can be going up at the same time.
Our job is to help you focus on what matters and what is important. Our commitment is to meet with you this year to review your unique life situation with the desire to help you Plan, Preserve and add Purpose. We are prepared to have uncomfortable, but essential conversations with households that are falling short of their stated goals. We are also prepared to talk with clients who are far outpacing their goals about how their excess can be used to impact their life of significance.