Quarterly Investment Update

Strong double-digit returns from most asset classes in 2017 gave way to losses for everything but bonds in 2018. The past two years have been a prime example of accepting the good with the not so good when it comes to investing. It’s simply an unfortunate part of the process.

On the plus side, the economy continues to grow and the job market appears strong. On the downside, recession fears have risen in recent weeks. One reason for concern has been changes in the yield curve – which is a graphical representation of yields paid on Treasury securities. Historically, when the yield curve becomes “inverted” (i.e. short term interest rates are higher than longer-term interest rates) it has been an early warning sign for an economic slowdown. The current curve is showing some inversion in rates (e.g. the rate for a seven year Treasury is below the rate on a one year Treasury), sparking concerns over the future of the economy.

When the yield curve has inverted in years past, the average time before an economic recession has been more than two years. The average period until the stock market peaked was 22 months, and the average gain was over 36%. The takeaway is that if the yield curve does continue to invert, it does not necessarily signal any imminent turn for either the economy or the stock market.

Having reached the end of another calendar year, it seems like a good time to revisit the conversation on quarterly investment reporting. When we transitioned away from that practice, it was part of an overall objective to focus more on the planning side – looking ahead and preparing as best as possible for the future, as opposed to focusing on what’s behind us.

Past returns tend to cause an emotional response depending on results, all based on calendar timing. Shifting measurement periods even a single day can significantly change the data, and we saw an example of this in recent days. Through January 3, a U.S. stock index showed 3-year annualized returns of 8.15% , while the results for the same index were 9.96% annually when measured through January 4. Shifting a single day changed the data by 1.81% annually over three years. Was there a dramatic shift in corporate profits? Did the economic outlook change significantly? Do we know anything more after one day? Not likely.

The bottom line is that numbers change day-to-day, but past results are not helpful in decision making going forward. There is no actionable information from recent history, and that becomes even more evident when you realize that a single day can have such an outsized impact. A practical long-term investment approach should not change based on recent performance data.

A diversified portfolio is the best way to handle large market swings, and your investment portfolio is driven by your financial plan. Your investment policy is based on how much risk you can take financially and emotionally.

When you need your money is a driving factor in the amount of assets invested in volatile instruments such as stocks. If you are in retirement now or plan to use your money in the short term, don’t use worry minutes obsessing over the current swings – your investment policy has you covered. And if you have plenty of time? Keep investing. Market swings are part of the process and think of market drops as a big sale. As you approach the time of needing your savings, you will dial back the risk.

Hang in there! There is likely to be plenty more excitement to come.

Warm regards,