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Markets Reward Discipline

Positions

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.”

                                                                                               – Benjamin Graham

After an extended period of relative calm, volatility has returned to the stock market. The Wilshire 5000 Index of U.S. stocks is down 17.5% quarter-to-date through 12/21, and down 8.8% year-to-date. Known as a “correction,” this kind of market movement is both normal and healthy. The purpose of this post is to let you know that we are watching your investments closely, to let you know our game plan to take advantage of the volatility, and to provide some historical perspective on what to expect from the market in the future.

A look at market history gives us the perspective that volatility is nothing new for the stock market. We’ve been here before. Patience, persistence, and a long-term focus are all required to be able to take advantage of the wealth compounding potential provided by business ownership via the stock market.

The chart above shows you that a dollar invested in 1970 in the MSCI World Index of stocks turned into $59 by the end of 2017. The chart also shows the barrage of “bad news” an investor was forced to endure along the way. It’s precisely the human emotions caused by the bad news that gets in the way of intelligent financial decisions. As famed investor and author Benjamin Graham said, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

There is always something to worry about in the world. There will always be some source of “uncertainty” and scary headlines. It may feel unnatural to simply sit tight with your investments during these times. However, the person that sat tight after investing the $1 in 1970 was richly rewarded by the magic of compounding in due course.

The chart above shows that one out of four years going back to 1926 has been a negative return year for the stock market. Yet the investor in 1926 earned about a 10% average annual return.

Predicting which years will have a negative return is both impossible and unnecessary, and if tried, will lead to inferior outcomes for most investors. Instead, we stick to a disciplined process involving diversifying among asset classes and rebalancing to set asset allocation targets which removes emotion from decisions and creates a system of buying when things are cheap and selling when expensive.

Our toolkit has many tools to take advantage of volatility. In addition to buying what is cheap and selling what is expensive, we can hold more or less cash depending on relative attractiveness, and may even be able to reduce taxes due.

We thank you for reading this edition of Positions. Our investments team takes your trust very seriously. Be assured that we are paying close attention to markets and your investments.

As always, please let us know if anything has changed regarding your financial goals or if your risk tolerance has changed in any way. Finally, please feel free to reach out to us at [email protected] if you would like to discuss this further.

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