What's necessary to get one individual to his or her destination may not be appropriate for someone else. Everyone starts at a different place, has a unique destination, and different likes/needs while travelling.
Think of it another way. Let's say two people are interested in becoming physically fit. One of them is training for his or her first marathon and another hopes to become an accomplished tennis player.
The weekly regimen a physical trainer would prescribe might include some of the same exercises, say warm-ups and stretches, but the similarities may quickly end at that point.
The same holds true for retirees Charlie and Mary, whose financial plan is primarily designed for income and the preservation of capital, as compared to Suzanne, who won't be retiring for another 25 years. Unlike Charlie and Mary, Suzanne may have a much larger concentration of stocks and more aggressive investments that simply aren't the right fit for the other two.
Suzanne isn't nearly as concerned about a steep sell-off and might even relish the opportunity to buy more shares in the event of a decline. However, Charlie and Mary need a much more cautious approach. Hence, what I might recommend for one person, I may not recommend for another.
Simply put, much like an exercise plan, recommendations vary based upon individual goals.
Eschewing the flavor of the month
By taking such an approach, we may choose to avoid stocks that are hot today, or tips you may have heard from acquaintances or the popular press.
To visualize it yet another way, each investment sits in your portfolio for a reason, much like a piece in a puzzle. And a piece that fits into one puzzle may not be right for another puzzle.
Whatever your goals may be, the asset allocation we recommend is designed with your objectives in mind. Choosing investments outside the chosen strategy can lead you astray.
A review of the key themes
Let's take a look at recent financial events. There have been a number of factors that have dulled interest in stocks over the last year.
I've touched on a number of these in recent letters and I won't rehash. But I do want to touch on a couple of the broader themes that have had an influence on stocks in recent action.
Table 1: Key Index Returns-April 2016
|Dow Jones Industrial Average
|S&P 500 Index
|Russell 2000 Index
|MSCI World ex-USA**
|MSCI Emerging Markets**
Source: Wall Street Journal, MSCI.com
MTD returns: March 31, 2016-April 29, 2016
YTD returns: December 31, 2015-April 29, 2016
**in US dollars
Let's start with the economy. Economic growth drives profit growth, and profit growth is the biggest factor that drives stock prices over the longer term.
On the one hand, fears of a recession that were present in January have receded, which have helped shares recover from a modest sell-off early in the year. But economic growth has been far from impressive.
A quick look at the latest data on Gross Domestic Product (GDP), which is the largest measure of goods and services in the economy, confirms this.
Preliminary data released late last month shows that first quarter GDP grew at an annual pace of 0.5%, down from a sluggish 1.4% rate in the final quarter of 2015.
Yes, we'll get two more revisions when more complete information rolls in, but it is not reflective of an economy that is moving ahead in high gear.
But did the economy really slow as much as the preliminary report suggested? In reality, that's up for debate.
Slow economic growth lends some support to corporate profits, but it does not significantly boost earnings over the short term.
The ebb and flow of the dollar
A second drag on stocks over the last year has been the strength in the dollar. For companies doing business primarily at home, it doesn't have much of an effect.
But for those larger multinationals that depend on a significant amount of sales from overseas, continued dollar strength has hurt at the margin. Look at it this way - while
a U.S. citizen traveling abroad benefits from a strong dollar, a U.S. corporation must translate foreign sales back into more expensive dollars, which nibbles away at revenue. But while
headwinds from the dollar remain, they are beginning to recede.
Could we see tailwinds to S&P 500 revenue in Q2 if the dollar remains at today's levels? It's a distinct possibility.
The Fed appears to be on the sidelines right now, although that is also subject to change based on recent "Fed Speak". So let's take a quick peek at Europe. In June, Britain will vote yes/no on a referendum to remain in the European Union (E.U.). Coined "Brexit," a vote against remaining in the 28-nation federation could create a new round of uncertainty in Europe.
The latest polls put those who want to remain in the E.U. in a slight lead (Reuters), which suggests this issue may get more coverage in the days and weeks ahead.
Markets hate heightened uncertainty, which could add to volatility in stocks.
But as I've consistently counseled, please look past short-term events that can create short-term waves, especially when they originate overseas.
Over the medium and long term, U.S. markets take their cues from what's happening at home.
That leads to my final point.
Stick with the plan that has been purposely crafted for your unique situation. Markets will go through cycles that take us to new highs and markets will also enter periods of volatility. Making decisions in haste based on an emotional reaction to current circumstances is rarely profitable over the long term. ###